The SPAC (special purpose acquisition company) trend has cooled off since 2021, but some SPAC M&A deals are still surfacing. One recent example: A SPAC called Minority Equity Opportunities Acquisition (MEOA) plans to merge with UCaaS provider Digerati Technologies, and Digerati has vowed to make additional acquisitions.
The current Digerati management team, led by Arthur L. Smith, will continue to run the company.
This is technology M&A deal number 806 that ChannelE2E has covered so far in 2022.
UCaaS M&A: About Digerati and SPACs
Digerati is a Hispanic-led cloud services provider (CSP) that offers UCaaS Unified Communications as a Service) solutions for the small to medium-sized businesses. The company, founded in 1994, is based in San Antonio, Texas.
Digerati and its subsidiaries support more than 4,000 business customers and 45,000 end-users. The company's annual revenue run rate was $32 million as of July 2022. Actual revenue was $8.2 million in Q3 of 2022, up 118% from Q3 of 2021. But the big Digerati revenue boost mainly involved acquired SkyNet Telecom in December 2021 and NextLevel Internet in February 2022.
The MEOA-Digerati merger is set to have an initial equity value of approximately $228 million -- translating into an enterprise value of approximately $145 million (assuming no redemptions from MEOA's shareholders), the companies said.
SPAC Definitions: SPACs, or blank-check companies, essentially are empty publicly held businesses that investors set up purely for acquisition purposes. After the SPACs go public/ raise money, they pursue an established business to merge into the empty shell. The deal essentially allows the seller -- a privately held business - to become a publicly held entity.
SPACs were popular in 2020 and early 2021, but in blank check trend cooled off significantly in mid-2021 and 2022 amid multiple challenges. Indeed, many SPAC deals have been canceled. Also, some SPACs ceased operations and returned money to investors before making M&A deals. Among the areas of concern: SPACs found it increasingly difficult to find and merge with quality companies, and financial regulators vowed to more closely monitor SPAC activities.
UCaaS Market: Still Hot or Cooling Off?
Demand for UCaaS remains strong, but ChannelE2E believes the market will increasingly consolidate around Zoom, Microsoft Teams, Salesforce Slack and Cisco Webex.
Among the anecdotal items to note in the UCaaS market:
- August 2022: RingCentral cut some employees, and 8×8’s stock fell sharply amid a bid to refinance $500 million in debt.
- July 2022: Avaya’s board of directors “removed” James Chirico from his role as president and CEO, and named Vonage veteran Alan Masarek to succeed him. The company also is planning cost cuts, though Avaya did not mention if the cuts involve layoffs.
- December 2021: Mitel confirmed layoffs after selling certain assets to RingCentral.
Take a closer look, and you’ll notice that RingCentral invested in Avaya in 2019, and RingCentral acquired certain Mitel technologies in 2021.
Elsewhere, UCaaS provider Intermedia canceled an IPO in 2021 amid “adverse conditions” in the IPO market. Shortly thereafter, NEC announced plans to invest $40 million in Intermedia.
SPAC Merger: MEOA and Digerati Executive Perspectives
In a prepared statement about the MEOA-Digerati merger, Digerati CEO Arthur L. Smith said:
"Our merger with MEOA positions Digerati for continued growth in a rapidly expanding and highly fragmented market. We believe a business combination with MEOA will facilitate the acceleration of our M&A strategy in a market with a healthy pipeline of acquisition targets and contribute to the combined company's organic growth as we continue providing small to medium-sized businesses with solutions and superior customer service."
