As we move full bore into the Holiday season, activity continues at an unusually high pace, both publicly and privately. Monday, public news broke that a SPAC called SCG Financial Acquisition Corp (NASDAQ: SCGQ) had a deal (“non-binding letter of intent”) in place to acquire Dallas-based Symon Communications, one of the larger and higher profile entities in the digital signage software space. Hidden in plain sight within the announcement was that SCGQ had a “previously announced proposed business combination with RMG Networks, Inc.” That previous announcement is hard to find anywhere but in a proxy statement filed in November of this year, and reveals that the RMG deal also takes the form of a letter of intent. But we can take it at face value that SCGQ has terms in place to make two very noteworthy acquisitions. And given the way that SPACs work, they need to either close an Initial Transaction, or fold up and return the money they have raised. So it will close, and you can rest assured that hard work went into the LOIs, which serve as a framework for the attorneys to paper the deals up. How will this work, and what might it mean in the broader, parallel universes of digital signage networks and providers?
How it works
Describing the machinations and history of SPACs would require a post of its own. You can read a nice summary of recent changes to SPAC requirements here. The key point is that the funds from an IPO ($80M in this case) are held in escrow until an Initial Transaction is approved by a supermajority of shareholders, and that the aggregate fair market value of the Initial Transaction(s) must approximate 80% of the funds in escrow, meaning $64M for SCGQ. As best I can determine, the deals may involve cash, equity or both. It is not clear if the RMG and Symon deals represent the entirety of the initial $64M transactions, or if there are others in the offing to get to the magic number. Those juicy details will be made public when the deals close. What does seem likely is that RMG is the lead dog here, and SPAC management will probably revert to a Board role, with the executive team at RMG assuming the reins post-closing.
The SPAC represents a relatively fast way for a private company to go public compared to an IPO, gaining it access to the public markets through negotiation and diligence rather than endless filings, roadshows and delays. The brunt of the capital formation was already borne by the SPAC founders, who are rewarded by leverage through warrants, and use the lures of speed and cash to negotiate favorable acquisition deals. In the case of SCGQ, we have a VC-backed company (RMG) and a PE-backed company (Symon) effectively going public under a single umbrella. Their investors will get liquidity in some combination of cash and equity for their patience and risk. For those investors, taking money off the table in this environment was probably deemed preferable to putting more in.
The resulting company will be interesting to watch, and I am sure we all look forward to deciphering their quarterly financials once things are launched. However, the first question that comes to mind is whether this is a strategic combination or an opportunistic one. If it is strategic, then one would expect much pomp and circumstance about how Symon’s IP and platform will be used across the board in RMG’s networks. You know, the synergy thing. Presumably, they could use that story to acquire additional networks and use captive software as opposed to commercial software to operate them. However, RMG’s networks are ad-supported, and that is not a sector of the market that Symon has focused on. A change from RMG’s legacy infrastructure could be costly and time consuming, and taking the risk of making a switch would presume that they see a strong fit with Symon as a starting point and a clear path to a new competitive advantage. My guess is that such a project is not likely to happen. Instead, Symon’s significant revenue base and predictable earnings will allow SCGQ (or whatever it re-brands itself as, probably RMG) to show some stability as it builds out the network portion of their new company, which may experience growing pains (as it already has). One clue may be found in the name of one of the founding investor entities: 2012 DOOH Investments, LLC. That would seem to indicate a mindset of opportunistic buys rather than a carefully crafted vertical play, especially given the timeframes involved.
What Does It Mean For The Industry?
The SCGQ deal will be good for the industry if it is consummated and begins to trade with credible volume and reasonable transparency in the New Year. Strong market support for a DOOH conglomerate would bode well for future deals in the public and private market for networks and providers alike. The fact that the VCs and PE firm have a positive exit in the space is also a good thing. While SPACs have a checkered history, and there is plenty of market risk and execution risk involved, I hope that this one works out well for everyone.
Here are some questions to ponder:
If a major network player whose systems are not necessarily a competitive advantage for them today acquires a software company and does not leverage the acquired IP, how long will it be until someone actually takes that strategy?
Would a vertically integrated DOOH entity be welcomed more warmly by investors than a conglomerate of companies in the field?
If a network company can effectively buy a software company, can the reverse occur as well?
The proposed deal opens a world of possibilities not only for themselves, but also for others in the industry. The RMG-Symon story is largely unwritten at this point, but the fact that investors appear ready to embrace companies with interests across segments of the industry may well open up opportunities for new business models that break the mold and separate from the pack. The announcement of the SCGQ deal may be a catalyst for many to examine outside-the-box concepts. That would only be a good thing. In 2001: A Space Odyssey, HAL may have put it best:
“I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.”
If a computer can do that, I suppose companies can as well.