Bank of America Merrill Lynch equity research group managing director Tal Liani looks at some of the Israeli tech companies, especially recent special-purpose acquisition company (SPAC) mergers - and despairs over everything regarding their approach to investor relations.
Liani, who specializes in cybersecurity, is a Wall Street investment banking veteran. If you are the head of a company with plans to go public on Wall Street - certainly if you plan to merge with a SPAC - you should pay close attention to what he says.
SPACs are blank check companies, with no activities of their own, which raise funds from the public so as to merge with an existing company within a pre-determined period of time, or else be required to refund payment to its investors. Since the beginning of the year, more than 10 Israeli tech companies have merged with SPACs, most of them worth over a billion dollars. As of today, for the vast majority of these companies, their investors have recorded post-merger losses, in some cases, half their investment and even more.
"The worst thing that can happen to a stock, no matter if it enters the market through a SPAC or an IPO, is that it becomes irrelevant to investors. That’s the kiss of death, and it’s very difficult afterwards to reignite interest in the company," warns Liani. The solution is to cultivate relationships with the investors, and to do it the right way.
Does this actually explain why the Israeli companies that recently completed SPAC mergers lost significant value after the merger?
"First of all, entering the market through a SPAC puts companies in a situation where they have ‘a chip on their shoulder’ - they have to prove themselves. Investors think that because a company went through a SPAC process, it must have failed going public through an IPO.
"There is also a certain structural problem: SPAC entrepreneurs raise money, and then they have 18 months to find investment or pay back the money to their investors. Suppose 12 months have already passed. There’s a risk the investment is less than ideal, and you’ll have to repay the money.
"Another problem is that there are promoters outside the company, who get a percentage on the deal. The question is, do they really bring in the right investments, and for the right reasons? Are they being motivated by their commissions or because it really is a suitable company? These are the landmines to beware of."
Liani says that, after a merger, there is a 6-12-month period during which time the company which has merged with a SPAC must prove itself. "Investors are initially apprehensive. There’s always concerns as to whether the company decided on a SPAC merger because it received a good valuation, or because it wasn’t good enough to go public any other way. You have to prove to the investor that you are worthy and good," says Liani.
Tal Liani's tips for tech companies on the way to Wall Street
US companies are wonderfully prepared
The shortcomings in investor relations are not unique to SPAC merger companies but, Liani says, entering the public market this way only increases the company’s burden of proof. "When an American company goes public - and I cover the cybersecurity sector and I know the companies - you usually see that they are wonderfully prepared.
"American companies understand that, at the beginning, they have to support the share trade. The hold analyst days that present all the numbers they need to know. When it comes to Israeli companies, no matter if it’s an IPO or a SPAC, often, one of my problems is getting them to understand that the investor is important.
"In Silicon Valley, the importance of the investor isn’t a question. You’re not running the company for your board member - it’s for your investor. They’re the ones who can raise the share and make it tradable, and that’s good for the company: the share is essentially currency, and with a strong currency, a company can make acquisitions, and recruit new employees."
What does that mean, that Israeli companies don’t understand the importance of investors?
"Oftentimes, especially when it comes to a SPAC-merged company, they enter the market unprepared, with no IR. I’ve come across cases where a company hasn’t reported earnings per share, only total earnings. I sit with them and they tell me they still don’t know how many shares they have, which is why they don’t report earnings per share. And then I say, ‘so, what am I supposed to do - guess’? Or they might provide first quarter and fourth quarter financials, and say ‘Q2 and Q3 to be provided later’".
"Companies provide only half the information
Liani adds that "The problem with these companies is not how ready they are for the public market in terms of their operations or product quality. They’re usually good companies with a niche market that they serve well, some are excellent and well managed. The problem is that they don’t understand there’s another aspect. That if they provide accurate financials, they can talk to investors about market size, market share, opportunity, and prove it in numbers.
"All these things serve to support the share. The numbers need to be organized, with quarterly reports, not just annuals, and a cash flow statement. Many times, they provide only half of the information because they provided only what was needed for the SPAC, and no more than that. But these extra measures must be taken - provide all the information, for example, sales data by divisions, geographic markets, and the like. This additional information enables investors to understand how the company is growing. "
In contrast, he says, "There are experienced companies that have prepared for the public market for two years and gone through the seven gates of hell, talking to investors, analysts and investors, and learning firsthand what to do."
Meaning, shortening the process of going public through a SPAC merger can turn an advantage into a disadvantage.
"There are several stages in the life of a company. First, the startup stage, then large startup, then the growth stage, and next comes the stage where the company gets ready for the public market and gains experience. SPACs skip over this stage, they’re a startup that grows and gets sold.
"When it comes to SPACs, because the companies skip the investor preparation phase that lack of knowledge will rebound on them. Maybe not today, when the market is crazy and the valuations are good, but the problem is what happens when the market corrects itself. I’m an old hand, I’ve seen market corrections, and I know enough to say a correction is coming. They’re the ones who will suffer because they won’t have strong investor support. That’s why we have to work on it while things are still good."
One example of a company that has gone through all the stages Liani mentions is cybersecurity company SentinelOne, which launched its IPO several months ago. "It's a supremely American company," says Liani. "The CEO is Israeli, but the way they communicate with Wall Street is completely American."
Accents are important, too
Liani also makes a practical recommendation: "From an Israeli point of view, if I were the manager of an Israeli company, I would make sure that my IR manager speaks English with an American accent. Israel entrepreneurs have all the local mannerisms, and often the VP Finance and the IR are Israeli too. That’s not the right thing to do. It’s done right at Check Point, for example, where the IR manager is an American who lives in the US.
"You have to talk to investors in their language, and they’re mostly American. Allot, CyberArk and Amdocs also manage their investor relations excellently in English. But many times, companies fail and work with whoever they feel comfortable with. That’s just not right to do. Investors want someone to speak to them to speak their language, with their slang, and in their time zone."
Language aside, the other challenges you mentioned regarding SPACs aren’t necessarily unique to Israeli companies. Are US companies that merge with SPACs also weak in investor relations?
"This isn’t an Israeli problem, it’s a global one. My bank colleagues who survey these companies will tell me about, ‘A great company, but the financials aren’t ready.' From a legal-regulatory point of view, they have everything - annual reports, last quarter reports, but they haven’t taken that last step of providing more information to their investors. In the end, if you go through a SPAC merger, you have to prove yourself and you can do it with the numbers.
"So, for the most part, when an American company merges with a SPAC, the story is similar. But - and as an Israeli I say this with love and not criticism - Israeli companies have a harder time when the management is Israeli, and if you don’t bring in someone with Wall Street technology experience. Very often, they have to make mistakes in order to learn from them."
Throughout the SPAC merger process, doesn’t anyone tell the company these things? Doesn’t anyone with IR experience tell them that they need a CFO or an IR manager with market experience? Doesn’t anyone tell them they should provide more detailed financial reports?
"Probably not. I don’t know what goes on behind the scenes. Venture capital funds certainly know the importance, because they’ve been active in the international market for years, but these funds aren’t always involved. So, either there’s no one with this knowledge, or there’s someone who doesn’t think it is important enough."
Published by Globes, Israel business news - en.globes.co.il - on October 17, 2021
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