Deal Flow – Conflict of Interest – SPAC Challenge

Deals must be done quietly, as secretively as possible and avoid, particularly with a SPAC transaction, any questions that raise conflict of interest issues.

According to CFO Magazine’s June 3, 2008 issue in an article titled, Loose Lips Sink Deals, Too, if deals are not done quietly and secretively they are less likely to happen. Not only do less deals get to closed transaction status when information is prematurely leaked to the marketplace (49% as opposed to 72%) but also the average time to close increases by 70 percent from 62 days to 105. These figures are the product of research done by the Cass Business School.

Professor Scott Moeller of the Cass Business School in London and a former managing director and senior investment banker at Deutsche Bank and Morgan Stanley managed the research.

The results of this study may help SPAC managers in their quest to find appropriate acquisitions. While SPACs and PEGs use an old model of slightly proactive and mostly reactive deal flow generation, the process, reliant on relationships and word of mouth advertising, creates a counter productive process for getting deals done. The Cass research supports the argument that new models for deal flow creation must be created.

In the case of a SPAC, where most of the associates and partners come out of the PEG world, two issues stand as obstacles to being successful and in compliance.

First, SPAC partners are forbidden by regulation to have any prior relationship with those companies they choose to acquire. Yet they use the aforementioned relationship based system of communication to foster deal flow. This is a dangerous practice and raises the question of conflict of interest.

Second, SPAC’s have a short time window in which to find and close on an appropriate acquisition. The old model, rife with conflict of interest possibilities, has as its foundation an antiquated system for deal flow generation. In the process of spreading the word on a deal with established relationships, necessary secrecy is dissolved. The very model used by SPAC’s and PEG’s to garner deal flow that will lead to an appropriate acquisition is self defeating. The old model creates a conundrum that both kills deals and those that do move forward take 70% longer to close.

In order to maintain secrecy as well as eliminate the conflict of interest question, the solution is to outsource the deal flow creation process. The old model does not serve either the SPAC’s or the PEG’s.

The means by which to advance expeditiously and in compliance is to contract intermediaries to find appropriate acquisition targets. While the SPAC’s and PEG’s are always open to fielding deals (reactive), a smart intermediary, who is also profit motivated, will not deliver choice targets. The good companies, once in the trusted embrace of an M & A intermediary, will lock them up in a sell side representation contract. Hence, the auction block is the only place a SPAC or PEG buyer will see these firms.

An intermediary who is contracted on the buy side of the transaction is the perfect means for satisfying both the SPAC and PEG need for: privacy, secrecy, no conflict of interest and an expeditious and efficient close.

Competition for the acquisition of profitable companies, thanks to globalization, is at a fevered pitch. Blank check companies and PEG’s must change their deal flow creation model and the sooner the better. Missed opportunity costs are quantifiable.

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