I had a recent conversation about this topic with a buy side investor that came about because we were both sort of lamenting the marketing efforts of some SPACS at the de-SPACing phase.  Obviously, everyone recognizes that this “post-announcement marketing phase” is crucial to the success of a combination, and yet, it isn’t necessarily well-executed for all SPACs. Sometimes the efforts fall short.

However, let’s review why marketing on the back-end of a SPAC transaction is so important. When a SPAC sells an IPO, they are (for the most part), selling that IPO to “SPAC investors”, not sector or fundamental investors.  This is because there is no actual operating company to evaluate and getting a sector investor to write a check for a shell is a very tall order.  Especially given that sometimes a SPAC finds a target outside of their intended sector.  Do you know the saying, “I’ll gladly pay you Tuesday, for a hamburger today”?  Well, in SPAC land, it’s flipped and more like, “I’ll sell you a SPAC today, for maybe a hamburger 18-24 months from now because I know you REALLY like hamburgers.  Except, it might turn out to be a hot dog instead.  Or it might be shoes!  But I’m pretty sure it’s going to be a hamburger, but you never know. Oh, and if it is a hamburger, I can’t guarantee it will be cooked.  And it might not have a bun…”  If you’re a hamburger-sector investor, would you buy that??   A good example of this is Hunter Maritime (HUNT), which intended to look in international maritime shipping space, but instead bought a Chinese fintech company.  Basically, they bought a hot dog…

But you know who IS willing to give SPAC teams money for 18-24 months?  SPAC investors.  Because they know they will at least be able to redeem their shares at combination for the cash-per-share held in trust, plus interest earned on the trust account.  It’s a loan of sorts. They buy a unit at $10.00, but can redeem the share at the combination vote for principal + interest and they get a warrant and sometimes a right to play with.

However, flash forward to when a SPAC announces a transaction, you now have an actual company that sector/fundamental investors can evaluate.  If the sector investors like the deal, that creates demand and hence the share trades up.  Ideally, the demand results in the share trading above the cash-in-trust level. However, if the share is not trading above cash-in-trust, there is no reason for SPAC investors to sell their shares. They’ll just redeem to get their principal + interest.  Which, of course, means the cash in the trust account will be depleted post combination vote. So the real trick is to get sector investors to want to buy the shares currently being held by SPAC investors – it’s a rotation of the shareholder base from SPAC investors to sector investors or investors that want to own the combined company post-vote and not redeem.

The easiest way to do that is to announce a really good transaction, but even then, you still need to let sector investors know about the deal. So, a SPAC puts out a press release announcing the acquisition, but then what?  Basically, the SPAC and the target (with the help of their capital markets advisors and underwriters) have to get the word out. This marketing phase, typically done via roadshow, is crucial to the success of the deal.

I tried a bunch of different ways to measure this “marketing phase-post announcement” via analysis, but SPACs are sort of impossible. There are just too many subjective variables.  You  would think there would be a way, but how exactly do you measure deal quality (which is difficult to begin with) against de-spacing efforts?  You can’t. Or at least, I haven’t figured out an objective way to do that.

There is, however, anectodal evidence.  For instance, let’s look at Haymaker I, below (zoom in if it’s hard to read).  Haymaker I is a great example of combination marketing done well.  If you recall, Haymaker announced their combination with OneSpaWorld back on November 1st of 2018, after the market close.  Haymaker closed that day at $9.85, but post-announcement, it traded to $9.97. Meh.  It didn’t even close over $10.00. In fact, all through November and December, the share price hung around $10.00 to $10.05, while the cash in trust was estimated to be $10.17 as of December 31st.  That’s…not great, to put it mildly.

However, two things happened in January to turn that result around.  One, the Haymaker team hit the road to visit those potential new investors we discussed.  Two, an Analyst over at Imperial Capital initiated coverage on OneSpaWorld and gave it a price target of $14.00.  So, not only is the Haymaker/OSW team out on the road banging the drum, but a third-party (Imperial) is saying, “Hey, this looks like a good deal”.  I asked around to see when the team was out visiting investors and it was apparently at the end of January and throughout February.  If we look at the chart again, on January 31st, the share closed at $10.15.  By February 15th, the share closed at $10.50.  That’s a nice bump in price over two weeks to get it trading above cash-in-trust. On February 26th, the Imperial Analyst put out a research note stating, “After Our Meetings with Management, We Continue to See Upside in the Stock—We Are Maintaining Our Outperform Rating and $14 Price Target.”  The share then took off like a rocket and on the day of the shareholder vote (March 6th), Haymaker’s share price closed at $11.18.  That’s marketing done right.

Since then, William Blair, Stifel, Nomura, and Jeffries have all initiated research coverage on OneSpaWorld, but having Imperial initiate coverage before the shareholder vote certainly was very helpful.  Additionally, the Haymaker/OSW team also marketed the hell out of their transaction and clearly their story resonated.  All of the above is to show that while the OneSpaWorld deal was inherently a great transaction, until they got the story out, nobody knew about it or cared.  And the share price reflected that.  It’s the old adage, “If a tree falls in a forest and no ones around to hear it, does it make a sound?”

Interestingly, ACT II Global, a recent SPAC that raised $300 million at IPO, was very pro-active by stacking their team with an investor relations professional right from the start, via Mary Celeste Anthes.  That’s will be very advantageous come combination-marketing phase.

But here’s the thing, as SPAC teams have improved and attracted big name talent such as Chinh Chu, Leo Hindery, and Dean Metropoulos, to name a few, so has the amount of press those big name SPACs have received.  So when Leo Holdings Corp. announced their deal with CEC Entertainment (Chuck E. Cheese), that made headlines across a wide variety of platforms essentially removing some of the burden of having to let investors know your acquisition exists.  That’s a major advantage of the tier-1 SPACs with headline names attached.  Tier-2 SPACs have a much higher hill to climb.  That doesn’t mean Tier-2 deal can’t have as great a result, it’s just a little bit harder.

However, the final takeaway is this: should SPAC investors be factoring in to their investment equation how successful they think a SPAC combination will be marketed? If you’re investing in a SPAC that has a very recognizable name attached to it, you are pretty much assured that whatever transaction they announce is going to get a decent amount of press. Which, as we’ve seen, is key to letting sector investors know you exist, which, if it’s a good deal, is key to creating demand.  So while those tier-1 teams typically offer meager IPO terms to SPAC investors upfront, those teams have a better than average chance of being more successful at marketing their deal simply because of the high-profile names attached.   Again, this is all dependent on whether the acquisition elementally makes sense to begin with, but tier-1 teams have a running head start.