The latest bust came May 28, when Liberty Lane Acquisition Corp. scrapped a planned $350 million initial public offering,
the first-ever blank-check IPO Goldman Sachs & Co. was planning to
underwrite. Goldman was taking a different tack with the SPAC in a move
to attract long-term investors. Management was to retain 7.5% as
opposed to the typical 20%, while the exercise price of $7.50 per half
warrant was 25% less than the price of a full share, bulking the
typical one share and one warrant per unit structure. Pricing was
postponed twice before the offering was scrapped; the different terms
made it harder to sell, Reuters pointed out.
Acquicor Technology Inc., which was founded by Apple Inc. co-founder
Steve Wozniak alongside other former Apple and IBM Corp. execs,
acquired Jazz Technologies Inc. in 2006 for $260 million, shortly after
it had gone public, raising $173 million. Jazz said May 19 Israeli chip
manufacturer Tower Semiconductor Ltd. would acquire it for $40 million,
or $169 million including debt.
Days earlier, Jamba Inc., owner of the California-based smoothie chain Jamba Juice Co., unveiled a restructuring
with plans to shutter 10 underperforming stores and slash 53 jobs,
which could help it trim $4 million in costs. In April, the company set
up a $25 million credit facility with Wells Fargo.
Deals have soured, but it's not stopping everyone. Shell company Heckmann Corp. said May 20 it would pay $625 million for China Water and Drinks Inc.,
in a move to take advantage of China's growing bottled water market.
Heckmann raised $400 million when it went public in November.
Meanwhile, the filings haven't stopped either. Angelo Gordon & Co. revealed the latest filing
April 23: a $300 million SPAC, or blank-check company, established to
in turn buy out a company. The New York alternative investment
management firm plans to raise $300 million to $345 million, it said in
a regulatory filing, for Angelo, Gordon Acquisition Corp., which has no
stated focus on a particular sector.
Also April 23, legendary college football coach Lou Holtz, who is now in the SPAC game, weighed in on both SPACs and football, while SPAC veterans expounded the virtues of their asset class at boutique investment bank Morgan Joseph & Co.'s Inaugural SPAC Conference in New York.
Meanwhile, The Deal's Vyvyan Tenorio zoomed in on a key problem
for SPACs right now in a Deal story April 17, a glut of registrations
have effectively shut the window, but, more importantly, she pointed
out:
A handful of recently minted SPACs have announced
they would dissolve because shareholders have failed to approve
proposed acquisitions. This development may be a sign that the shine on
SPACs may be fading among investors -- the vast majority of whom are
hedge fund arbitrageurs.
Seven SPACs are now
liquidating, half of which were announced in the last few months: Good
Harbor Partners Acquisition Corp., Grubb & Ellis Realty Advisors,
Harbor Acquisition Corp., HD Partners Acquisition Corp., JK Acquisition
Corp., North American Insurance Leaders Inc. and Oracle Healthcare
Corp. Shareholders have rejected 13 deals.
The reasons? They include "recent declines in Ebitda multiples to
disaffection over the viability of the acquisitions or outright
uncertainty over investment performance," Tenorio wrote, citing
industry sources. Whether this is a short-term trend or a long-term
change of tack remains to be seen. But good or bad, it seems like a
week goes by without some SPAC-related news.
MARCH IN SHORT
- March ended with a bang when a regulatory filing revealed
that actor and producer Ashton Kutcher, best-known for "That '70s Show"
and MTV's "Punk'd," signed on to William Morris Agency Inc.'s
Performance Acquisition Co., a SPAC hoping to raise $500 million on the
American Stock Exchange.
- The news came days after Liberty Lane filed March 25 to raise its $350 million vehicle, a plan it abandoned two months later.
- A day earlier, SPAC Marathon Acquisition Corp. agreed to a deal for London's Global Ship Lease Inc. that values the target at $1 billion.
- And
that news came just weeks after New York hedge fund Halcyon Asset
Management LLC's $974 million reverse merger with Alternative Asset
Management Acquisition Corp., a blank-check company, announced March 13.
SPACs, or blank-check public offerings, are here to stay, having
represented 21% of cash raised in the IPO market in 2007, notes Deal
contributor Joseph Bartlett. "The SPACs phenomenon is based on
fundamental shifts in the U.S. financial markets, the first being the
extended closure (since 2001) of the IPO window in the U.S. for small-
and midcap companies."
So what are they, exactly? Tenorio offers a primer:
As blind pools, SPACs don't have an operating
business when they raise money in public markets. But they have 18
months from an IPO to complete a deal using about 80% of net assets. Up
to 95% of the money raised is held in a third-party trust. Once a SPAC
has identified a target, it has to notify shareholders and submit
documentation to the SEC. Shareholders can approve it and sell or
redeem their shares. If the SPAC fails to successfully make an
acquisition, the trust is liquidated and the cash returned.
SPACs are an investment favorite of hedge funds (Amaranth Advisors LLC loved 'em before its spectacular implosion) and, of late, large institutional investors like mutual funds. She writes:
Clearly there's an appetite for SPACs among sponsors
whose access to capital may be limited, and among hedge funds that hope
to profit from arbitrage opportunities. SPACs have also opened avenues
for well-heeled financiers such as Texas private equity pioneer Tom
Hicks. In June, Hicks filed to raise $400 million through an IPO for a
SPAC. [He wound up raising
$552 million in October.] Hedge funds, too, are exploiting these
vehicles to take themselves public. GLG Partners LP, one of Europe's
largest hedge funds, went public in 2006 through a reverse $3.4 billion
takeover of Freedom Acquisitions Holdings Inc., which raised $528
million late in the year.
And they're also a popular exit route for private equity firms, notes The Deal's John Morris. (For other ways PE firms can capitalize, see below.) Eleven SPACs have bought private equity-controlled U.S. companies since mid-2006, he says, citing a SPAC tracker.
| Pick a SPAC - any SPAC |
| Can't
find a buyer for your portfolio company? Consider a SPAC. Special
purpose acquisition vehicles -- blank-check companies that have raised
capital in the public markets to invest in a few companies -- are
providing exits for many private equity firms. |
Announced |
Target |
Acquiring SPAC |
Selling sponsors(s) |
Deal value ($mill.) |
March 2008 |
Essex Crane Rental Corp.
(industrial cranes) |
Hyde Park Acquisition Corp. |
Kirtland Capital Partners |
$210 |
Feb. 2008 |
Critical Homecare Solutions Holdings Inc. |
MBF Healthcare Acquisition Corp. |
Kohlberg & Co. LLC |
420 |
Jan. 2008 |
Stream Holdings Corp.
(business process outsourcing) |
Global BPO Services Corp. |
H.I.G. Capital LLC |
226 |
Sept. 2007 |
Boise Cascade LLC's paper and packaging assets |
Aldabra 2 Acquisition Corp. |
Madison Dearborn Partners LLC |
1,625 |
Feb. 2007 |
Brooke Credit Corp.
(lender to insurance agencies) |
Oakmont Acquisition Corp. |
Quantum Associates LLC |
105 |
Jan. 2007 |
American Community Newspapers LLC
(suburban and weekly newspaper publisher) |
Courtside Acquisition Corp. |
Spire Capital Partners LLC,
Wachovia Capital Partners |
204 |
Dec. 2006 |
ISI Detention Contracting Group Inc.
(prison security and safety equipment) |
Argyle Security Acquisition Corp. |
Merit Capital Partners,
William Blair Mezzanine Capital Partners |
42 |
Dec. 2006 |
Alsius Corp.
(hospital body temperature control devices) |
Ithaka Acquisition Corp. |
MPM Capital |
97 |
Sept. 2006 |
Royal Wolf Trading Australia Pty. Ltd.
(portable storage and freight containers and offices) |
General Finance Corp. |
Equity Partners Management |
87 |
Sept. 2006 |
Jazz Semiconductor Inc.
(contract manufacturer) |
Acquicor Technology Inc. |
Carlyle Group,
Conexant Systems Inc. |
260 |
June 2006 |
Great Lakes Dredge & Dock Co. |
Aldabra Acquisition Corp. |
Madison Dearborn Partners LLC |
322 |
|
THE GOOD, THE BAD AND THE FIXES
More generally, SPACs seek to overcome some of the problems involved
in the back-door route -- reverse merger into a public shell. It's a
two-step process, Sonnenschein Nath & Rosenthal LLP's Bartlett
notes: An underwritten IPO followed by an acquisition, effectively a
back-door IPO but with built-in safeguards, promising shareholders get
a say in choosing the target. He lays out the plusses, particularly
when compared to shells, and the minuses:
- It affords retail investors access to many advantages of
private equity. While hedge funds typically buy the stock, any average
investor can too.
- Investors buy what the SPAC has set out to do; whereas investors in a shell are bystanders.
- And shareholders can vote for a deal or against it and recoup much of their investment, which is far less common with shells.
- All
told, a SPAC deal is still a reverse IPO, so if a company is to float
successfully, why not use the traditional avenue? The road is shorter,
cheaper and less risky. But the window, for now, is closed.
- Further,
many deals involve proceeds that fall short of the amount deemed
advisable to escape orphanage, a problem that can be countered with
rollups.
The remaining issues are tougher, he notes:
- How attractive is a company willing to hang around an
average of 218 days for a yes vote that may or may not come? "If it is
any good, it should be snapped up quickly by financial and/or strategic
investors."
- And a no vote can be catastrophic. "Take a look
at the stock price nosedive of targets left at the altar by LBO funds
reneging at the last minute." (For more on buyouts gone bust, see a
related Dealwatch.)
- Further, once proxy materials go out, anyone can take a peek: competitors as well as customers.
- The 18-month deadline imposes tremendous pressure to cut a deal.
So what are the fixes?
- For SPACs themselves, a team-up with a PE fund may be the best model. (See below.)
Potential conflicts of interest surrounding the role of private equity
investors in SPACs can also arise, but the shareholders always have the
cash-out option.
- Meanwhile the SEC needs to regulate to
prevent market manipulation (one SEC rule is that SPACs can't
predetermine acquisition targets, a contested point because they're
often industry-specific) and the average 218-day delay (also aimed at
preventing abuse) from sign to close needs to be shortened.
- Finally,
reliable data on post-closing stock performance is essential, he notes,
to help investors decide which SPACs and targets will withstand the
after market.
GAME PLAN
SPACs are trying to differentiate from the checkered past of blind pools,
note
William F. Griffin Jr. and Andrew D. Myers, shareholders with Davis,
Malm & D'Agostine PC. There are investor protections: the
aforementioned shareholder vote on acquisitions and cash-out option;
management and frequently underwriters have skin in the game via stock
and warrant purchase agreements and deferred fees, respectively; a
relatively small amount of offering proceeds goes toward working capital
to consummate an acquisition.
So for a private equity investor, there are three ways to go about getting into the SPAC game, notes the SPAC lady herself, Tina Pappas, a managing director with Morgan Joseph:
- Sponsoring a SPAC as an issuer: PE firms that have done so include: MBF Healthcare Partners LP,
Steel Partners, LLM Capital Partners LLC, Camden Partners Holdings LLC
and GSC Group, while several others are in registration.
- Exits for existing investments:
72 SPACs have more than $12.3 billion in capital looking for
acquisitions. She calls a reverse merger one of the most compelling
options.
- Co-investing in a SPAC acquisition: In an
arrangement where an existing consortium of SPACs just need some more
cash to complete a transaction, a firm could come in and perhaps be
entitled part of the founders' 20% ownership right and warranty options.
A DIFFERENT ANIMAL
And in a then-recent twist, Tenoiro noted in July:
SPACs have now tapped the Rule 144A [under which an
issuer can offer a private sale of securities to qualified
institutional buyers, or QIBs, without government oversight] market for
privately issued, unregistered securities, which coincidentally is an
increasingly popular alternative for private equity firms looking to go
public.
It affords more flexibility, she writes, as QIBs are perceived as
sophisticated institutional buyers who don't need the same protections
as individual or smaller investors. They're not subject to the long SEC
review process (drawn out to guard against potential abuses). And how
many 144A SPACs there have been is hard to say, given that they're
private placements, she writes. "Not surprisingly, sources say
investors in these offerings are essentially the same community of
hedge funds that invest in SPACs."
And after the IPO come the mergers. McDermott Will & Emery LLP's Joel L. Rubinstein and Dennis J. White weighed in on the nuances in September. Unsurprisingly, competition for the listings is fierce. As The Deal's Donna Block noted Feb.
21: Nasdaq's move to institute new listing standards for special
purpose acquisition vehicles is an attempt to capture ASE listings.
| Dealwatch executive summary |
The Date |
The Action |
5.21.08
4.18.08
3.31.08
3.25.08
3.24.08
3.14.08 |
Some SPAC deals sure are bad apples.
Are SPACs falling out of favor?
Ashton Kutcher as SPAC dealmaker.
Goldman underwrites Liberty Lane.
Marathon Acquisition Corp. grabs Global Ship Lease.
SPACs as exit routes for PE owners. |
| 2.21.08 |
Are new listing standards for SPACs on the way? |
| 2.15.08 |
GHL Acquisition prices $400 million offering. |
| 2.2008 |
MBF Healthcare buys Critical Homecare Solutions. |
| 2.01.08 |
Pappas weighs in on opportunities for PE investors with respect to SPACs. |
| 1.25.08 |
Brazil Ethanol launches roll-up campaign. |
| 10.04.07 |
Hicks drums up $552 million for SPAC. |
| 9.28.07 |
How SPACs have evolved. |
| 7.20.07 |
No more oversight? |
| 7.06.07 |
MEHI forms vehicle. |
| 4.19.07 |
Tina Pappas as SPAC lady. |
| 1.22.07 |
PharmaAthene goes public via SPAC. |
| 10.20.06 |
What to know before SPAC'ing. |
| 9.19.06 |
Amaranth loved the SPACs. |
| 7.06.06 |
MBF files for SPAC IPO. |
| 5/6.2006 |
SPACS are on the rise. Reverse Merger Report concurs. |
| 11.04.05 |
How special are they? Luisa Beltran weighs in. |
| 10.14.05 |
Biotechs turn hopes toward SPACs. |
Source: The Deal |
Comments
Questions for investors in the SPAC, or blank-check offering, equation surrounding how to gain shareholder approval, how to navigate conflict-of-interest issues and whether SPACs have indeed jumped the shark headlined Dealflow Media's 2008 SPAC conference. 
Many complex challenges often have simple, albeit not easy, solutions.
Considering the SPAC’s plight of having only an eighteen month window to find a deal, having stockholder review of target acquisitions, having the limitations put on SPAC founder relationships to generate deal flow and a reliance on technically astute but non street wise financiers to find appropriate targets, the SPACS still looking for acquisitions may be on a deal flow merry-go-round.
That merry-go-round is made up of the same people trying to find or waiting for an appropriate deal to come through their door. Hence, it is a fallacy to believe that the relationships you have (current paradigm) will generate the path to the target you need.
The SPAC’s, those committed to an acquisition, must go beyond their present paradigm of contacts to be successful.
There are just over 8000 privately held firms in the United States with revenues between $200 MILL and $1 BILL. Twenty-eight percent of those firms (statistically) are owned by Baby Boomers who, if not now, will soon be committed to an exit.
The SPAC structure brings myriad benefits to those private owners. The SPAC folks need to readdress their deal flow generation process. They need a new means by which to garner quality deal flow.