Semiconductor SPACs: The Trend That’s Here to Stay

Article By : Sally Ward-Foxton

As SPACs gain popularity, expect to see more semiconductor companies taking this route to go public in 2021...

Achronix’ recent announcement that it plans to merge with special purpose acquisition company (SPAC) ACE Convergence Acquisition Corp. was one of the first of this type of deal in the semiconductor industry, but it is unlikely to be the last.

A SPAC, sometimes called a blank-check firm, is a publicly listed company which serves as a vehicle to take other companies public quickly by merging with them. A SPAC has no commercial operations; it exists only to find a single target company and merge with it. If a SPAC doesn’t find a target company to merge with in two years, funds are returned to investors. This helps make SPACs popular with investors; there is the potential to make plenty of money with shares in the company taken public, combined with very low risk.

Win-win
SPACs make money for their investors by merging with companies that have growth opportunities, with low risk – if the investor is not happy with the target company chosen, they can withdraw funds.

The management of the SPAC often holds a sizeable proportion of the SPAC’s shares. There are typically also earn-outs for SPAC management – the structure of these earn-outs differs from SPAC to SPAC, but typically they are linked to the company’s performance post-merger.

The target company gets the benefits of an IPO, but with reduced risk. They can negotiate the terms of taking the company public, including the company’s valuation, with more certainty for employees and shareholders. Also, the process typically happens very fast, often 3-4 months compared to 2-3 years for a conventional IPO, meaning there is less risk of market conditions changing in the mean time.

Popularity contest
SPACs have existed since the 1990s but in 2020 they suddenly became extremely popular, making up about 45% of 2020’s record $177 billion IPO volume, according to data compiled by Bloomberg. Bloomberg’s data also showed that a record $78 billion was raised in the US for SPACs in 2020, exceeding the combined total for all previous years. This is thought to be the result of debate about whether the conventional IPO process left enough money available for companies going public, combined with increasing interest in alternative investment types during the current market uncertainty caused by the global pandemic. The result is the current crowd of around 200 SPACs searching for targets.

Achronix’ CEO Robert Blake told EE Times that the company had been approached by multiple SPAC entities, but decided to merge with one they saw as a good fit.

“We talked to some different SPAC companies, and some of them really didn’t have domain knowledge, so they weren’t a good fit,” Blake said. “[ACE Convergence Acquisition Corp.] was a good fit because they understood the space that we’re in and what we’re trying to do, the customers that we’re going after, the markets and applications… They would much more likely understand our story than some of the other SPACs out there that could be really quite diverse and not in the technology space.”

“A good fit” might mean that the SPAC’s management have a deep understanding of the target company’s market and products, but as experienced leaders from the target industry, they can also work with the company going forward, in order drive strategy to help the company meet the growth targets typically required for management earn-outs.

Semiconductor SPACs
Outside of chip companies, the automotive tech world is no stranger to SPAC deals. There were several of note in 2020, particularly in lidar and electric vehicles, both “hot” tech areas.

  • Luminar – a lidar startup whose systems will appear in Volvos from 2022 – post-deal valuation of $3.4 billion.
  • Velodyne Lidar – the leading automotive lidar sensor maker, though it also makes smaller sensors for industrial robots – post-deal valuation of $1.8 billion.
  • Aeva – lidar sensor maker with a continuous wave “4D lidar” technology which can accurately measure distance and instant velocity – post-deal valuation of $2.1 billion.
  • Electric vehicle startups including Canoo, Fisker, Lordstown Motors and Nikola Motors have also taken the SPAC route in the last year.

Achronix’ SPAC deal was one of the first we’ve seen in the semiconductor industry, but it is not the only one. Last month, automotive SoC supplier Indie Semiconductor announced it will merge with SPAC Thunder Bridge Acquisition II, led by financial executive Gary Simanson. The value of the combined company was $1.4 billion and the transaction should close in Q1 2021.

Indie makes mixed-signal SoCs for ADAS (ultrasound and vision), user interface and the connected car. It has shipped more than 100 million units to Tier 1 customers globally, and is on 12 Tier 1 approved vendor lists. The company has plans to expand into lidar and AI acceleration for autonomous driving and charging controllers for electric vehicles.

Should we expect to see more semiconductor SPACs in 2021? Achronix’ CEO Robert Blake thinks so, given the semiconductor industry’s relatively long lead times; during the SPAC process, companies are able to pitch forward-looking financials to investors, which is not allowed in a conventional IPO.

“One of the things about semiconductor companies, especially in some end market segments, is the time to build a product and the time for that product to ramp up is certainly longer than 12 months,” he said. “And so that ability to provide insight into how the company may perform or the opportunities it may have over a longer period of time may favor the SPAC [route]… it does make it more attractive for companies that need a longer time to generate revenue or ramp up revenue.”

Looking forward, the SPAC trend will no doubt continue, and we should expect to see more semiconductor SPAC deals in 2021. Bloomberg reports that there are currently around 200 SPACs looking for target companies, all with the same 2-year time frame to get a deal done, or dissolve. While the semiconductor industry is only one source of companies for SPACs, it is rich with venture capital, meaning there may be more later-stage companies still private and therefore available to take public than in other sectors.

One reason the SPAC trend could burn out is bad publicity due to the failure of post-merger companies, as happened in the 2000s. If the supply of SPACs continues to exceed the number of suitable target companies, the “market” for suitable target companies may become more competitive; if SPACs are too eager to rush through deals before they expire, we could start to see more failures. “Strategic SPACs” – those with specific expertise that can add value to their target companies – should go some way towards preventing this, since deep expertise in the industry should help prevent mergers with companies that are too weak or not ready.

For now though, the SPAC trend seems to be here to stay.

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