How New SPAC Music Acquisition Corp. Will Spend Its $230M IPO Money

Courtesy of NYSE

Music Acquisition Corp. CFO Todd Lowen (second from left) and CEO Neil Jacobson (center) at its initial public offering on the New York Stock Exchange on Feb. 5, 2021.

Co-founder Neil Jacobson says MAC's target "may not be a fundamental music company but music is in the next iteration of their growth strategy."

Music Acquisition Corporation has the type of generic, vague name that's typical with SPACs -- special purpose acquisition companies, but it's a perfectively descriptive moniker. MAC raised $230 million in a Feb. 3 initial public offering on the New York Stock Exchange for the sole purpose of acquiring a private music company and taking it public in what's called a reverse merger. Which music company that might be is not yet known.

Launched by former Geffen Records president Neil Jacobson and Todd Lowen, a Wall Street veteran of Lehman Brothers and Barclays Capital, MAC is the first music-specific SPAC in a wave of SPACs that began in 2019 and has overtaken traditional IPOs as the most popular route to the public markets.

Since leaving Geffen in December 2019, Jacobson says he has learned "the ins and outs of a SPAC," whereas Lowen already had years of experience. "We've been working on this for over a year," says Jacobson, who also owns Hallwood Media, a producer and songwriter management firm.

With SPACs, known as "blank check" companies, investors give their money before they know what company will be acquired. Investors get an up-or-down vote on a SPAC's merger and will be repaid if MAC does not close a deal within two years of the IPO. Following an acquisition, the target will add MAC's IPO proceeds to its balance sheet and take over the post-merger company's identity – stock ticker and all. Jacobson will go from MAC's CEO to a board member of the new company.

"[We're] really kicking the tires of a lot of different ways of how our SPAC could unfold into the music industry -- which is going through one of the greatest booms in its history, if not the greatest boom," Jacobsen says. "I don't anticipate it slowing down at all."

MAC believes a company in any one of four categories would fit Jacobson's skill set.: A music company, such as a label or publisher, is an obvious possibility, and Jacobson senses opportunity. "While there is great success for Warner, Universal, Sony, they're all doing fantastic, there are going to be new companies that come up and become major players in this business," he says.

Since SPAC investors are attracted a high-growth narrative, MAC will also  consider a music-focused technology or social media company. Or MAC's  target, says Jacobson, "may not be a fundamental music company but music is in the next iteration of their growth strategy."

Whatever the company, it needs to have strong leadership, show double-digit revenue growth and be ready for the public markets, says Lowen. "We're not trying to play the lottery here. We are looking for companies that are working."

MAC hopes to spend its IPO proceeds on a high-growth company with about a $1 billion valuation. It must return shareholders their money if doesn't close a deal within two years of the public offering. Size is important since a lower valuation won't interest large investors with portfolios in the many billions of dollars, Lowen explains.

The target company also needs a good story to sell investors.

"So, there is a critical mass that you need to get the kind of institutional-level support to have a successful equity story," says Lowen. The right music company can fit the narrative of a fast-growing company in the revived music industry.

Although SPACs are decades old, their popularity has surged in the last two years as retail investors chase the pre-IPO paydays usually reserved for hedge funds, private equity and institutional investors. There were more SPAC IPOs in the U.S. through March 15 of this year than in all of 2020 -- 257 to 248, with gross proceeds of $82.9 billion and $83.3 billion, respectively -- according to SPACInsider. In 2019, there were just 59 SPAC IPOs on U.S. markets.

Some SPAC targets achieve the same eye-popping valuations that the traditional IPOs they passed on might deliver. On March 16, eToro, a cryptocurrency trading platform, announced it will merge with FinTech Acquisition Corp. V -- which raised $250 million through a Nasdaq IPO in December 2020 -- at a $10.4 billion valuation. Recent reports said eToro was in talks with Goldman Sachs for a traditional IPO at a $5 billion valuation. Instead, eToro will land on the Nasdaq without the costly financial and administrative  requirements and scrutiny of a traditional IPO.

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SPACs are popular in high-growth industries without much of a financial history, such as cannabis and battery technology. They are also common in digital media: content syndicator Taboola and Group Nine Media recently merged with SPACs, and Buzzfeed and Vice -- whose values have dropped recently -- are reportedly in merger talks with SPACs.

Music is a relative newcomer to SPACs, compared to bigger industries that have jumped headfirst into the market. No household name music moguls have yet entered the fray, but it's easy to imagine successful entrepreneurs such as Jay-Z or Diddy, or frequent startup investor David Guetta, being either a SPAC founder or advisor. (Caliva, a cannabis company that formed a joint venture with Jay-Z in 2019, was acquired by a SPAC on Jan. 15.) In addition to attracting investors, music celebrities could leverage their relationships and expertise to help a company expand. Although he's not a household name, Jacobson is motivated to be a difference maker for a target company.

Jacobson has positioned himself as a knowledgeable music executive who can bring investors a strong acquisition target and help unlock its potential. "I'm not looking to run the company," he says flatly. Even so, SPACs perform best when led by a chairman or CEO with operating experience rather than people from the financial world, according to a 2020 report by McKinsey & Company. From 2015 to 2019, these "o perator-led" SPACs outperformed other SPACs by about 40% one year after the merger, according to the report.

"I want to be the best board member they've ever had. I want to be the guy that runs through walls for them," Jacobson says. "I want to be their wild card that can get into rooms other people can't get into."