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SPACs, Technology IPOs and MSP Software: Mergers and SEC Regulations Coming?

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Is the SPAC (special purpose acquisition company) market on a collision course with the MSP (managed IT service provider) software market? It's too early to say, but chatter involving SPACs taking a look at MSP-focused technology companies is growing louder, according to ChannelE2E's sources.

Moreover, the fast-growing SPAC industry may also attract closer scrutiny from the U.S. Securities and Exchange Commission (SEC), new SEC Chairman Gary Gensler has indicated.

A SPAC or "blank check" company is designed to raise funds in an initial public offering (IPO) with the aim of acquiring a private business. That private company then becomes public as result of the merger, Reuters notes. Or as Investopia puts it:

"The founder of a SPAC pools money from investors and he or she may contribute to the SPAC to form a blank check company with the sole purpose of acquiring another company—or companies. The money raised through the IPO of a SPAC is put into a trust. The funds are held until the SPAC successfully identifies a viable merger or acquisition opportunity to pursue with the invested funds."

SPAC Momentum, Potential Market Bubble and Regulatory Concerns

David Solomon, CEO, Goldman Sachs
David Solomon, CEO, Goldman Sachs
Gary Gensler, chairman, SEC

In 2020 there were 248 SPAC IPOs that raised almost $83 billion, and there are 310 total active SPACs as of January 12, 2021, according to SPAC Track. All that activity could be good news for technology companies seeking buyers.

But in some cases, the flood of competing SPACs could lead to lower-quality companies being taken public, some sources warn.

In a January 2021 earnings call, Goldman Sachs CEO David Solomon offered this warning about the SPAC trend, according to Bloomberg:

“There will be something that will in some way, shape or form bring the activity levels down over a period of time. Like many innovations there is a point in time as they start where they have a tendency maybe to go a little bit too far and they need to be pulled back or rebalanced in some way.”

Meanwhile, New SEC Chairman Gary Gensler plans to closely scrutinize SPACs -- which means the industry could face heightened regulations, Benzinga reports.

Example SPACs Focused on Business and Technology

More money is flowing into the SPAC market, and some of the companies in the market have experience investing in telecom, managed and cloud services companies. Among the SPAC-related moves to potentially watch:

1. Apollo Strategic Growth Capital II, the second blank check company formed by Apollo targeting growth-oriented businesses, filed on January 6 with the SEC to raise up to $400 million in an initial public offering, Renaissance Capital says. Parent Apollo Global Management has extensive experience in the IT market. The investment firm owns distributor Tech Data, and is well-known for its earlier investments in MSPs and IT services providers such as Presidio and Rackspace.

2. Global Synergy Acquisition, a blank check company targeting technology services, raised $225 million, Renaissance Capital reports. The management team plans to acquire a business that can benefit from its operational and investing expertise in sectors such as IT Services and Business Process Outsourcing, or BPO, collectively defined as Technology Services or IT Enabled Services (ITES), Renaissance says.

3. North Atlantic Acquisition, a blank check company targeting the consumer, industrials, and telecom sectors in North America and Europe, filed on January 4, 2021, with the SEC to raise up to $300 million in an initial public offering, Renaissance Capital reports.

4. Thoma Bravo Advantage is blank check company formed by private equity firm Thoma Bravo in late December 2020. The SPAC filed a form with the SEC indicating that it plans to raise up to $900 million for an initial public offering (IPO) and an associated software company investment/acquisition. In preparation for that potential acquisition, The Thoma Bravo Advantage IPO was completed on January 20. Parent Thoma Bravo already has private equity stakes in such MSP-friendly technology businesses as Barracuda, ConnectWise, Solarwinds and Sophos, among many others.

MSP Software Companies: Potential Financial Moves

Meanwhile, multiple technology companies in and around the MSP market are marching toward financial events -- though the moves won't necessarily involve SPACs. Among the potential moves to note:

  • Multiple backup and disaster recovery (BDR) as well as cloud data protection software companies are up for sale and seeking buyers, ChannelE2E has confirmed.
  • SolarWinds is seeking to spin out SolarWinds MSP as a completely separate business sometime in the first half of 2021. The potential spin-out will be known as N-able, according to SolarWinds MSP President John Pagliuca. Existing SolarWinds shareholders will be owners in the N-able business.
  • And Kaseya is readying itself for a potential IPO or financial event later this year. The company grew overall revenues roughly 20 percent in 2020, and Kaseya's cybersecurity business now generates roughly $100 million in revenues.

What's known for sure? Private equity firms and SPACs are working in and around the technology sector -- looking for new investment opportunities. Both the MSP and MSSP software markets could be tempting targets, considering the ongoing demand for IT outsourcing, automation and cybersecurity services across the SMB sector.

PS: Here’s some more info about the pros and cons of SPAC investments, according to Protiviti, a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit.

Originally published January 14, 2021. Updated multiple times thereafter.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.