ATI flubs revenue forecast, highlighting perils of SPACs

ATI flubs revenue forecast, highlighting perils of SPACs

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Mergers with SPACs are seen as a shortcut to public markets for privately owned businesses that want to avoid the traditional initial public offering (IPO) process. But as SPACs hunting buyout targets have proliferated, so have concerns that the companies they’re taking public aren’t ready for prime time.

Bolingbrook-based ATI’s second-quarter earnings fiasco adds fuel to those criticisms. ATI reduced its full-year revenue projection from $731 million to a range  of $640 million to  $670 million and its earnings forecast from $119 million to  range  of $60 million to $70 million. The company blamed unexpectedly high “attrition”  among therapists at its 900 locations around the country.

In what might be charitably called a rookie mistake, ATI dropped the bad news on Wall Street without warning ahead of time that a forecast revision was coming. Adding to the impression of disarray, ATI’s second-quarter earnings release lacked such basics as an earnings-per-share figure, a balance sheet, a cash flow statement or, as analyst Michael Petusky of Barrington Research put it in a note to clients, “a good defense for why the company’s original guidance (which was officially maintained up until yesterday) ever made sense.”

Reaction was swift: ATI shares fell more than 50 percent over two days. At $4.33 late Wednesday, the stock has lost 58 percent of its value since the SPAC merger in June.

Amid the blowback, ATI CEO Labeed Diab stepped down Aug. 9. Board member John Larsen will run the show as executive chairman until ATI finds a new CEO. ATI didn’t answer questions for this column.

The breakdown at ATI highlights some risks that may not have been fully appreciated as SPAC offerings surged to 401 so far this year, up from 248 in 2020 and 59 in 2019. Among their attractions has been a belief that they offer growing private companies a quicker, cheaper route to public markets. 

This seems to have spawned a false sense of security with regard to potential liability under securities laws, particularly when it comes to financial forecasting. SPAC companies have acquired a reputation for overly optimistic projections like ATI’s.

“We have some concerns (as does the SEC) revolving around the broad leeway SPACs are currently given in projecting future results,” Petusky wrote in an earlier report. “One investment professional whom we respect called the SPAC space ‘the wild west with fewer guns but just as dangerous’ – a pretty good line and mostly accurate.”

That leeway may never have been as broad as some SPAC promoters believed. Gregory Mark, a professor at DePaul University College of Law, points out that public companies are required by law to provide investors with “all material information” about their business whether they go public via a SPAC merger or the traditional route. 

SPACs ignore that requirement at their peril. Battalions of plaintiff’s lawyers are massing for an assault on ATI, as they would with any public company that flubbed a forecast so badly. Meanwhile, newly appointed SEC chairman Gary Gensler recently told Congress the agency is considering new protections for SPAC investors. Earlier this year, another SEC official said SPAC mergers should get “the full panoply of federal securities law protections, including those that apply to traditional IPOs.”

That should worry anybody who considers SPACs to be a cost-effective workaround for inconvenient securities regulations.

The ATI situation also lends credence to concerns about the dealmaking frenzy unleashed by SPACs. Investors who buy SPAC stock trust the sponsors to identify and acquire companies that are ready for public markets. That trust may not be entirely justified, as ATI’s mishandling of its first earnings report illustrates. With better due diligence, the staffing issues that undermined ATI’s forecast might have come to light before SPAC investors were asked to approve the merger. But as hundreds of SPACs scramble to find deals, temptation to skimp on due diligence may increase.

The lesson is that SPAC buyouts deserve the same rigorous scrutiny from regulators and investors as companies going through traditional IPOs. Without it, expect more ATIs.

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