Why ERP is Instrumental in Public Offering Processes, Including SPACs

By Anthony Stames, High Tech Industry Marketing Lead

Financial leaders wear two hats: one for compliance, making sure that the company’s actions and accounting are correct and address the regulations of the various jurisdictions where the company conducts business; and one for strategy, ensuring the company meets financial milestones and success metrics. And both roles are especially important when a company is going public, including when that is by way of a special purpose acquisition company (SPAC).

A recent Oracle NetSuite webinar on SPACs vs. IPOs, presented by Tom Kelly, director of product management and marketing for Oracle NetSuite, and Sean Fanning, vice president of portfolio and investment analysis with OpenView, a SaaS-focused venture capital firm, discussed why SPACs became a popular alternative to an IPO for bringing companies public. Most importantly, they discussed how a robust ERP system is crucial in managing an unpredictable future, no matter which path a business chooses. That’s because both SPACs and IPOs require a historical view of data and real-time access to financial and operational data in order to satisfy stakeholder concerns, inform decision making and act as a guide for sustainable business strategies. Having automated processes and easy access to the information is crucial to a firms’ success.

How NetSuite Improves SPAC and IPO Success

Companies going public often run their business on NetSuite. In fact, NetSuite customers make up 66% of tech IPOs since 2011. In 2021 alone, a total of 42 NetSuite customers have gone through a SPAC or IPO.

NetSuite’s robust financial infrastructure provides a powerful valuation and audit process that can help to ensure that a company can meet regulatory compliance requirements from the start, which can make private companies in need of a sponsor, otherwise known as target companies, more attractive to investors.

Many SPAC deals have failed before completion or confront problems later when there is a need for a Material Weakness disclosure. NetSuite helps to position companies for a successful SPAC IPO offering from day one, allowing the CFO and the sponsor to work together to tell a strong story of future success. With real-time reporting capabilities and forecasting, NetSuite makes it easy to answer shareholder concerns on tactical performance questions about budgeted vs. actual spending, sales pipeline, and cash flow analysis, while delivering detailed information on a company’s five-year strategic plan.

NetSuite can help the business address four areas of change when a company goes public:

Legal: Public companies are effectively playing a new game when they enter the public market and confront the new laws and regulations surrounding the public equities market. For example, the Sarbanes-Oxley Act (SOX) is a U.S. federal law that aims to protect investors by making corporate disclosures more reliable and accurate. NetSuite acts as a safeguard by embedding controls to keep companies compliant as well as providing detailed audit trails of every transaction that businesses can easily and accurately report on, reducing the time and effort required to meet stringent SOX requirements.

Regulatory: Once a public company understands the rules of the game, it is important that they understand who is refereeing the game and how the rules are enforced. Public companies are required to comply with many different regulatory entities. For example, NetSuite provides functionality that makes the complicated requirements of revenue recognition as easy as depreciating a fixed asset to comply with ASC 606 and IFRS 15 revenue recognition regulations. Today, most companies operate across borders – this requires compliance with local regulations like China’s Golden Tax Rule. NetSuite meets accounting regulations across multiple countries including US, UK, Germany, Japan, Australia, Singapore, Hong Kong, China, Malaysia, Thailand, and more, so that companies can be assured of meeting regulatory requirements with accuracy and efficiency.

Shareholders: Public companies need to understand how to work with their new teammates: shareholders. Shareholders expect transparency, timeliness, consistency, and candor from public companies. NetSuite’s ability to quickly close the books and provide accurate, compliant, and timely information will provide the basis for a company to deliver key information from SEC reporting requirements to board of director and shareholders meetings almost with the press of a button.

Leadership: Leaders of a public company need to fundamentally change the way they manage risk, make decisions, and set objectives for the company. NetSuite customers can quickly develop robust reporting processes via dashboards and custom reporting while leveraging built-in disclosure controls that ensure preparing for and complying with public company requirements is as efficient as possible with strong internal controls and accurate financial reporting. 

SPAC Benefits and Popularity

There are three main benefits for companies choosing to go public via a SPAC over the traditional IPO route.

1. Time/Costs- SPACs can be a faster and less expensive route, concluding in months rather than years, and with less disruption than an IPO.
2. Extras- For companies that are not yet profitable, the sponsor can act as a stamp of approval and SPACs can include financial projections in proxy statements.
3. Financial benefits:
   1. Targets have more upside potential by being paid in stock while retaining more control over their valuation.
   2. A SPAC IPO can act as a deleveraging event and/or reverse merge of non-core businesses with other entities.
   3. Public trading of shares creates a lower cost of capital and liquid shares, which can help attract talent.

SPAC Regulation

However, recent results show that many SPACs are not as successful as either party hoped, with plenty of new debate about the advantage of SPACs over IPOs.  According to research from Renaissance Capital:

“Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of – 29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs. Only 29 of the SPACS in this group (31.1%) had positive returns as of [Sep. 30, 2020]”

The markets have already caught on to this, and hints about changes to regulations have begun to emerge. CNBC’s SPAC Post Deal Index, which tracks the largest SPACs within the last two years, has eliminated all of its 2021 gains

After a record of 109 new SPAC deals in March, SPAC issuance dropped to only 10 in April. SPAC-owned funds decreased to a median of $6.67 in cash/share (down from an average of $10/share they raise from investors) due to SPAC investors dropping out before completion of an IPO. This could be due to the economic incentive for a sponsor to get a deal done even if it is not the best deal.

The SEC has recently provided accounting guidance, stating that some SPAC warrants could be classified as liabilities rather than equity instruments for accounting purposes. If these restrictions are approved, current pipeline deals, as well as existing SPACs, would be required to backtrack and recalculate their financials in 10-Ks and 10-Qs for the value of warrants each quarter. NetSuite’s out-of-the-box custom report writing capabilities, built-in corporate governance and detailed audit trails down to the transaction level can make the financial statement restatement process a simple, straightforward, and efficient process.

The NYSE has also made a newly SEC-approved rule allowing companies to raise funds through a direct listing; direct listings could cut demand for both SPACs and traditional IPOs. This further boosts the importance of a strong ERP structure in place to provide access to financial data that are paramount to investors such as forecasting cash flow and liquidity.

Moving Forward

Because of the various pressures from potential government regulation and the slowing of money coming into the SPAC space, there is undoubtedly a slowdown ahead for the fast-paced SPAC train. With the increase in the number of SPACs, the quality of targets has gone down. The market has slowed, furthering the need for transparent and accurate reporting to make a company both attractive for a SPAC sponsor and more successful when going public.

In the short term, it is more likely that only the companies with the highest upside will successfully go public via the SPAC route; however, the focus on quality will be better for both companies and the markets. Companies that can gain from the SPAC alternative will have it as an option. And the markets will have confidence that these companies are more desirable than past SPAC-IPO companies. To learn more, check out the on-demand version of NetSuite’s discussion with OpenView on SPAC vs. IPO.

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