SPACS….So Hot Right Now…

Late Friday afternoon, GS Acquisition Holdings Corp. filed for a $600 million NYSE SPAC IPO, capping off a busy week that included one SPAC rumor, two IPOs, an acquisition announcement and a liquidation. Exciting times indeed. GS Acquisition Holdings will be sponsored by GS DC Sponsor I LLC (an affiliate of Goldman Sachs), along with David M. Cote, the former CEO of Honeywell. And while the GS Acquisition initial filing still has a lot of blanks that still need to be filled in, we dug deep and found some very interesting items worth noting…

Summary Terms

First, as far as the IPO terms and details, the structure is fairly boiler-plate stuff for an IPO this size. Summary terms include:

• 100% in trust ($10.00 per share)
• Unit comprised of one share of common stock + one-third of a warrant
• 24 months to complete an acquisition (with a focus on the industrials sector)
• 15% holding limit for stockholders wishing to redeem

There’s nothing fancy included (yet) like an anchor investor or a backstop and the Sponsor’s private placement purchase to bring the trust to 100% is a straight purchase of warrants for $1.50.

Non-Compete

Here’s where it gets interesting…

As previously mentioned, David M. Cote is leading GS Acquisition as CEO, President, Secretary and Chairman. Additionally, until March 2017, Mr. Cote was Chairman and CEO of Honeywell, a multinational conglomerate with a global workforce of 130,000. He was also non-Executive Chairman until just a few weeks ago (April 23rd!) when he stepped down. As such, Mr. Cote is being held to a non-compete agreement with Honeywell until 2023.  The filing states:

“The non-compete agreement precludes Mr. Cote from, without the written consent of Honeywell, becoming employed by, performing services for, or otherwise becoming associated with (as an employee, officer, director, principal, agent, manager, partner, co-partner or consultant or any other individual or representative role) any competing business of Honeywell (or any business Mr. Cote knew Honeywell was considering for a potential acquisition prior to his departure) until 2023.”

Now, a non-compete is pretty standard.  However, when it involves Honeywell, which is a multi-national, Fortune 100 company in the INDUSTRIAL sector, that might potentially be problematic for a SPAC that wants to acquire something in the… INDUSTRIAL sector. Again, the language reads as  “…any competing business of Honeywell…”.  That seems awfully broad.  If Honeywell really wanted to, they could make things difficult for GS Acquisition, but let’s put that aside and get to the other management wrinkle  – Raanan A. Agus.

Raanan A. Agus, currently functioning as a Director for GS Acquisition, is the only other GS Acquisition team member along with David Cote.  However, he is also still currently a Managing Director of Goldman Sachs. In fact, he co-heads the Goldman Sachs Investment Partners platform, which includes a global long/short hedge fund and direct private equity investing business. Why does this matter?  Again, the S-1 seems to sum it up quite nicely:

“Our management team, in their other endeavors (including any affiliation they may have with Goldman Sachs), may choose or be required to present potential business combinations or other transactions to Goldman Sachs, other GS Accounts or third parties, before they present such opportunities to us.” 

Basically, Goldman gets first look at any potential deals before GS Acquisition.

Conflicts of Interest Relating to Goldman Sachs

Additionally, there is an entire section in the prospectus titled, “Proposed Business—Certain Potential Conflicts of Interest Relating to Goldman Sachs” but the distilled version is this:  Since Goldman is a Sponsor of GS Acquisition, any potential acquisitions or investment ideas generated within Goldman Sachs (the bank) that are suitable for a Goldman Sachs client (in any of its business units), Goldman Sachs is under no obligation to present those opportunities to GS Acquisition first. In fact, Goldman and GS Acquisition are in direct competition with each other and one could argue Goldman (the bank) has a fiduciary duty to present it to their clients first.  So will GS Acquisition only see discarded second-rate opportunities from Goldman? Hard to say…legal language is often left up to interpretation and I am not a lawyer, but it is something to think about for sure.

But wait!  I bet you’re thinking about VectoIQ, which was partially sponsored by Cowen!  Well, it’s apples and oranges.  Goldman Sachs Asset Management is one of the world’s leading investment managers, with approximately $1.29 trillion of assets. Cowen has $10.8 billion.  In this case, size and breadth do kind of matter.  There’s just not the same potential for conflict.

Having said all of the above, GS Acquisition Holdings will still be a hot deal and it got press nearly immediately after filing on Friday.  However, it should be noted that this is only the initial S-1. The prospectus has not even been populated with symbols yet.  It should be interesting to see what changes come about in subsequent filings and especially after hitting the road for marketing.  We’ll be watching…