When a SPAC identifies a potential target for a business combination, the decisions made around the structure of the business combination can greatly affect both the SPAC (pre-combination) and the surviving entity (post-combination).
Typically a SPAC business combination will be structured through reverse merger recapitalization or forward-merger, both have varying consequences or lack thereof on the current SPAC financially. This structure is preconditioned on many factors that go into the evaluation of the accounting acquirer, which could be the SPAC itself or the target entity.
For accounting purposes, the acquirer is the entity that has obtained control of another entity (the “acquiree”) and consummated a business combination. While the SPAC is ordinarily the “legal” acquirer in the combination, it does not always meet the criteria to be classified as the accounting acquirer. This is because the determination of the accounting acquirer is driven off of “control” of the post combination company, regardless of which entity is legally acquiring the other.
Many SPAC transactions have some form of equity consideration included, which complicates the analysis of who is ultimately the accounting acquirer. This is a very important distinction because it drives the pro forma presentation and how the transaction is accounted for post-combination. The determination of whether control has been obtained begins with the evaluation of whether control should be evaluated based on the variable interest or voting interest model.
Determining which entity has the controlling financial interest in the combined entity and would be the accounting acquirer may require significant judgment. For example, the combined entities may be equal in value, or the stockholders
both entities may be evenly split may not clearly control the combined entity based on voting interests, in which case the acquiree is not obvious. Withum ranked number one of non-Big 4 firms in total proceeds raised in IPOs over the last five years, auditing 62 IPOs for a total amount raised of approximately $19 billion.
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In these cases, ASC 805 requires further analysis on one or more of the following indicators:
- VOTING RIGHTS The relative voting rights in the combined entity after the business combination. The acquirer usually is the combining entity whose owners as a group retain or receive the largest portion of the voting rights in the combined entity. In determining which group of owners retains or receives the largest portion of the voting rights, an entity shall consider the existence of any unusual or special voting arrangements and options, warrants, or convertible securities. SPAC combinations involve both redemption options as well as warrants and convertible instruments which would require more analysis as to who truly has voting control.
- BOARD CONTROL The composition of the governing body of the combined entity. The acquirer usually is the combining entity whose owners can elect, appoint or remove a majority of the members of the governing body of the combined entity. In some cases the board can be a combination of SPAC and target entity members, in these cases the way the seats are appointed, length of time in these seats for each individual and significant decisions that can be made by the board should all be considered.
- MANAGEMENT CONTROL The composition of the senior management of the combined entity. The acquirer usually is the combining entity whose executive team manages the combined entity. While management of the combined company comes from the target in most SPAC transactions, new management may be appointed, or there could be a combination of new and continuing management. In these cases, the number of positions taken by the target’s and SPAC’s management teams, and the roles, responsibilities and seniority of those positions, should all be considered.
- RELATIVE SIZE The acquirer usually is the combining entity whose relative size (typically measured in assets, revenues, or earnings) is significantly larger than that of the other combining entity or entities. Because the SPAC is a shell company with only nominal operations, this indicator usually leads to the target as the accounting acquirer.
- EQUITY INTEREST The terms of the exchange of equity interests. The acquirer usually is the combining entity that pays a premium over the pre-combination fair value of the equity interests of the other combining entity or entities. In most SPAC transactions the targets are non-public companies and the fair value of the shares of those entities is difficult to value.
- LARGE MINORITY OWNER The existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest. The acquirer usually is the combining entity whose single owner or organized group of owners holds the largest minority voting interest in the combined entity. In this instance, a situation could arise where a single stockholder from the target company could wind up with a single majority ownership after the business combination and that would make the target company the accounting acquirer.
Some indicators under ASC 805 may give conflicting conclusions as to who the accounting acquirer is and significant judgment will be required. If a SPAC is the accounting acquirer, the fair value of the operating company and its assets acquired and liabilities assumed are recognized as a forward merger. The pro forma financial information included in the proxy statement will reflect purchase accounting and will require a valuation of the operating company’s assets and liabilities. If an operating company is determined to be the accounting acquirer, the accounting for the transaction will be similar to a capital transaction because the only asset of the SPAC is typically cash obtained from IPO investors.