If you didn’t know better, you’d easily mistake Franklin McLarty for one of a million other corporate guys — a banker, maybe, albeit one considerably less buttoned-down than stereotype.
You easily picture the Central High School grad on the sidelines of a soccer field watching his kids on Saturdays or cutting the grass in some comfortable, upwardly mobile neighborhood. He speaks with an easy humor that’s engaging and authentic, as a true son of the Natural State.
But spend a little more time around McLarty — brother to Arkansas auto baron Mark McLarty and son of former Arkla Gas CEO and White House Chief of Staff Thomas “Mack” McLarty — and you discover this is not your average boy-next-door middle executive.
Having cut his teeth on his family’s far-flung and diverse corporate interests, he’s one of a new breed of financial entrepreneurs: smart, opportunistic and audacious enough to launch a Wall Street-style business venture from the heart of down-home Little Rock.
As McLarty sees it, address is incidental and opportunities universal, but there’s something innately satisfying about succeeding in places others ignore.
“I think Arkansas is just special. The way it’s situated geographically, it’s sort of a transitional state,” he said to describe its mojo. “You’re situated in a few different regions, depending on where you’re standing in the state. I think that probably orients a sensibility and understanding that allows Arkansas to punch above its weight class a little bit.”
McLarty has landed some Mike Tyson-sized jabs recently. In July 2020, he launched MDH Acquisition Corp., a blank-check company that raised $276 million in a February IPO. Also referred to as special purpose acquisition companies (SPAC), such ventures are part of a raging trend on Wall Street, public firms that exist solely to buy other companies, thereby taking them public.
To this end, MDH Acquisitions’ very name states its purpose in life, aligning with McLarty’s unpretentious, straight-ahead style. There’s no fancy wordplay or dancing around the central goal. What you see, right down to the letterhead, is what you get.
“It’s just really exciting how this all came together, very organically and naturally,” he said. “We’ve been able to be successful in the heartland of the United States, where a lot of the big, bold bracket investors from the coast aren’t really established anymore. That’s where we think we have a competitive advantage, or loaded dice, to say it another way.”
MDH Acquisitions’ birthing comes during a SPAC feeding frenzy. Far from a new concept, SPACs have enjoyed a recent run unlike anything the market has ever seen. SPACs raised $32 billion in IPO fundraising in 2016; three years later that number reached $13.6 billion, per Investopedia. Last year, 248 SPACs raised $83 billion, and as the Harvard Business Review reported, the new year is poised for yet another big showing. In January 2021 alone, such vehicles have already raised about $26 billion.
“Part of the reason SPACs are so popular is that it’s a much more efficient way to go public,” McLarty said. “The regulatory regime made that process more onerous, as well as expensive, than it was in the days of John Tyson, J.B. Hunt and Sam Walton. In fact, as we started to evaluate SPACs, one of the things I thought about was, could any of those guys have taken a year and a half off and spent millions of dollars to go public way back when, when they were running their company in a very hands-on way? Probably not.
“As a matter of fact, there are some companies that are going public via SPACs that could do a traditional IPO offering, and they’re choosing not to. I’ve got a friend who sold his company via SPAC, and he said, ‘Look, we’re going to [go public] anyway; this saves us a year and a half.’”
Beau Blair, MDH’s chief executive officer, said, “If you look today, there are 50 percent fewer companies that trade publicly than there were 20 years ago. Some of that is the effect of private equities taking companies private, but to Franklin’s point, the regulations have made it so difficult. It’s nerve-wracking because you don’t know what’s going to happen in a traditional IPO until the day you process. You don’t know what the valuation is going to be, you don’t know if it’s going to succeed. It could get pulled, and then you’re out legal fees, accounting fees, etc.
“That’s the brilliance of a SPAC; within a short period of time, you can provide certainty and have the expectations set for the founder of the company to be able to access the public markets.”
With the capital it raises via an IPO, the SPAC goes shopping for a company to acquire. Once that deal is consummated, the SPAC ceases to exist, its shareholders now having been converted to stakeholders in the acquired entity.
McLarty said, “From my side, it’s very much like a traditional IPO, it’s just sequenced a little differently. There is a meaningful amount of regulatory requirement from every facet — legal, accounting and all of that — when you launch a SPAC. The company, when we do a deal with somebody and they take over our shell and take over the stock ticker, they’re still going to have to go out and build enthusiasm with analysts and deliver results and so forth and so on.”
SPACs are not without their detractors, turned off by what critics call a lack of transparency. In a typical stock purchase, for instance, the investor knows something about the company they’re buying into. SPACs are not compelled to identify what kind of company they intend to go after, let alone identify potential acquisition targets.
Another knock on many SPAC-acquired companies is their subpar performance post-merger. With so many SPACs angling in the market — all of whom must meet a two-year deadline to acquire a company — some critics argue the pool of quality acquisition targets may be past diluted. Just last month, The New York Times wrote about the post-acquisition struggles of Richard Branson’s spaceflight business, Virgin Galactic, taken public via a SPAC led by billionaire venture capital investor Chamath Palihapitiya. What was then the gold-standard example of a SPAC in action has quickly become a cautionary moral that even the whales can be wrong.
For their part, McLarty and Blair acknowledge some of the activity that’s gone on in this space has been shaky, but that due diligence and rigorous assessment of potential targets can still reveal solid companies geared to meet investor expectations. They say that’s especially true in what they define as the heartland, a middle-America region of the country many on Wall Street have ignored for too long. And, they say, MDH Acquisitions Corp. is uniquely oriented to discover them.
“It’s a methodical process that we’re doing right now in our tier system,” Blair said. “It’s rigorous due diligence, it’s talking to the management, sitting down with them and really understanding their projections, their outlook. And then, you need to look at the industry and the sector and see what kind of trends are going on there.
“We’ve got eight deals that we’re looking at that are Tier One. They fit the criteria of, is this a sector that we know? What’s the size of the company and does it fit our metrics? You’ve got to come up with your metrics to manage your time and really evaluate the deals. Then, we’ve got probably another six or seven in what we’re calling Tier Two. We just don’t know enough about these companies, but the concept is interesting, and we’re going to learn more.”
McLarty added, “You look at some of the companies that are going public right now through SPACs and a lot of them are very quality companies. I didn’t say all of them are quality companies, in my opinion. That’s where the proof will be in the pudding.
“I do think our team has very complementary skill sets and backgrounds. I came up, really, as an operator through the hotel business, automotive transportation and so forth. Other team members bring a slightly different skill set to the table that, I think, is a really complementary set of perspectives. If we all start nodding along on the same deal, that’s probably a pretty good sign that we need to pay close attention to that one.”