Potential Benefits
Ability to avoid attempting another IPO so soon: The highly-publicized IPO process, which ended up being cancelled due to weak investor demand, brought lots of criticism regarding WeWork’s self-inflicted “implosion.” The New York Times called the IPO “an implosion unlike any other in the history of start-ups.” One venture capitalist remarked, “There aren’t going to be a lot of bankers who are willing to go down the path of a roadshow again with WeWork; there’s too much historical baggage with the company.” WeWork is likely in no hurry to begin the IPO process again so soon either.
Ability to take advantage of current SPAC demand: The large number of SPACs competing for deals could also work to WeWork’s advantage. By pitting the various SPACs against each other, WeWork may be able to negotiate a better deal, in terms of both the merger price but also the deal terms. SPACs sometimes waive or modify their terms, and there are recent examples in which final deal terms increasingly saw promotes being decreased to win auctions with popular targets. e.g. one recent SPAC merger agreement included a lockup agreement that prohibited promote shares from being sold for a specified period and stipulated that the promote shares would not fully vest until the stock reached a certain price. Bill Ackman’s Pershing Square Tontine Holdings SPAC has no sponsor promote, and his Pershing Square hedge fund is buying shares at its public IPO price along with warrants it claims are fairly valued.
Deal value certainty: Another possible benefit is the lack of the requirement to come to an agreement on a valuation with a large number of investors as in an IPO. WeWork would only have to agree on price with the board of one SPAC and receive majority shareholder approval from one SPAC. The pricing of an IPO depends on the book-building process for the IPO, which is based on investor demand, and the offer value is unknown until the pricing by the underwriter at the very end of the process.
Ability to share forward-looking information with acquirer: Firms are challenged to convey certain information to investors in an IPO prospectus since securities laws generally prohibit projections and other forward-looking statements. A merger negotiation would generally allow WeWork to share more information with safe harbour from such laws and possibly convince an acquirer to pay a higher price.
Potentially high (overvalued) offer: To overprice an IPO, the target would have to convince numerous large investors to overpay, and the listing underwriter must not follow the normal tendency to underprice. In a SPAC merger, you only need to find one SPAC sponsor to overpay. Given the hundreds of SPACs currently looking for deals, WeWork is better positioned to listen to offers and hope that bidding escalates the offer price, resulting in a winning bid that exceeds the intrinsic value (a winner’s curse).
Potentially lower costs: While WeWork would not directly pay for the underwriting discount, as shown in the numerical example above, the actual direct fees of the underwriting discount are possibly higher as a percentage of proceeds after redemptions. However, at least in that example, WeWork would be giving up less than 5 per cent of the stock, so the total discount fee would likely be less than the total amount paid in an IPO—albeit for raising less capital, but still being listed. In addition, there is no IPO underpricing; however, there is the underpriced founder promote shares in addition to the warrants providing some dilution. There are potentially lower indirect costs than those associated with an IPO: time spent by management marketing the IPO, participating in a roadshow, and completing the book-building process.
Speed: A SPAC merger may be faster than an IPO because the lengthy IPO process—drafting a S-1, registering with the Securities Exchange Commission (SEC), and doing the roadshow—is not needed. However, the merger proxy voting may lengthen the process. The length of the IPO process has been estimated to be 24–36 months versus three–four months for the merger process.
Potential Disadvantages
Loss of autonomy and control: A partnership with a potentially high-profile sponsor may not be what WeWork wants. An IPO would allow WeWork to continue in the near term with near-full autonomy, albeit with minority public shareholders. With a SPAC, unlike in an IPO, WeWork would need to find a sponsor it felt comfortable with as a partner. As with any merger, the terms of the merger will dictate who controls the post-merger board of directors, etc. Thus, the loss of control could range from insignificant to partial to total.
Possibility of raising less capital: The average size of a SPAC IPO in 2020 was about $300 million. There is also typically a large proportion of redemptions by public shareholders, reducing the amount of acquisition capital. This reduces the ability of a SPAC merger to provide a large capital injection. Ultimately, the size of such an injection would depend largely on the potential size of a PIPE investment. In an IPO, firms typically raise capital equal to about 20–25 per cent of the outstanding shares after the offering multiplied by the IPO offer price.
M&A fees and lack of any synergies: The SPAC merger, unlike an IPO, will result in deal-specific M&A advisory and legal fees, which have been estimated at 2.7 per cent. A SPAC merger, unlike many other mergers, is not likely to offer cost or revenue synergies since SPACs are just “a box of money.” If WeWork could find an acquirer who would realize merger synergies, WeWork could negotiate for a large share of the synergies and command a higher offer price.
Potentially high expenses: As discussed in the numerical example, the actual direct fees of the underwriting discount are possibly higher as a percentage of proceeds. There would also likely be fees associated with any PIPE financing raised. As mentioned above, there is the underpriced founder promote shares in addition to the warrants providing some amount of dilution. In this respect, the SPAC merger is like an IPO in that the firm ends up selling underpriced stock.
SPAC incentives: The SPAC is in business to get a good deal for its shareholders, and its objective is to acquire the target at below fair value. As noted by Matt Levine, “Some of the high-profile recent SPACs have essentially paid $10 a share for companies that immediately traded up to $20 or $30 per share—the sort of embarrassing IPO pop that venture capitalists love to complain about.”