Investors endorse blank-check firms
Companies with no earnings and no business plans are scoring on IPOs
By Aaron ELSTEIN
Published on July 05, 2004
Six weeks ago, Tremisis Energy Acquisition Corp. raised $33 million in a stunningly successful initial public offering. The question now is what to do with all that money.
Manhattan-based Tremisis could get into the energy business, but Chief Executive Lawrence Coben, a former Bolivian power company boss turned investment banker, thinks the company's future might lie in medical waste disposal, or sewage control, or maybe even radon cleanup. In fact, about the only thing he can promise at this point is speed.
"The money we raised will help us act quickly when we see an opportunity," Mr. Coben says.
Despite a conspicuous lack of assets, operations, or even firm business plans, so-called blank-check companies like Tremisis are back in vogue. In the past 12 months, 16 such empty acquisition vehicles have gone or planned to go public, raising about $300 million, compared with none in the previous 12 months. Seven of those have been sold by two tiny New York-area investment banks, EarlyBirdCapital Inc. and Broadband Capital Management.
Although blank-check companies, sometimes known as blind pools, have lent themselves to fraud and manipulation in the past, backers say that this crop is far sounder and that new safeguards are in place to protect against abuses.
"It's a much improved, more investor-friendly product, and people involved in these deals are of a higher caliber," says David Nussbaum, chairman of Melville, L.I.-based EarlyBirdCapital, which specializes in blank-check IPOs, including the recent Tremisis share issue.
Nonetheless, analysts urge investors to steer clear. "These deals are highly speculative rolls of the dice," says John Fitzgibbon, an IPO analyst at research firm 123jump.com Inc. in Jersey City.
Vague notions
Take Arpeggio Acquisition Corp., for example, a client of EarlyBird. In papers filed in May for its planned IPO, Arpeggio merely stated that its search for a merger partner would span all of the United States and Canada. The Manhattan-based company declined to say exactly what it was looking for, noting only that its search "will not be limited to a particular industry."
Several other newly minted blank-check companies, including three brought to market by EarlyBirdCapital and Broadband Capital, are focusing their acquisition searches on China. The rub there is that investors have little way to assay the true value of any enterprises the pools may end up buying.
What makes such pools even riskier is that no blank-check companies trade on a stock exchange. All of them are quoted on the OTC Bulletin Board, the market's equivalent of the Wild West, where it can be tough for investors to unload their shares.
A tiny number have yielded spectacular results. Thirty-three years ago, investors in an obscure blind pool struck it rich when their company merged with a struggling broadcaster that ultimately grew into Turner Broadcasting System Inc.
Hartley Bernstein, president of Stockpatrol.com, a Manhattan-based Web site that tracks the OTC Bulletin Board, estimates that fewer than five out of 100 blank-check companies ever post a single dollar of profit. He says the problem "is that the handful of successful stories that exist are used to sell all the bad ones."
There have been plenty of those, including, most infamously, a string of them created by a former camera salesman named Aaron Tsai. He says he made a fortune from forming about 50 blank-check companies in the late 1990s. In one case involving a laser eye treatment company, Mr. Tsai pumped up its shares to $25 and then sold out just before the stock collapsed to pennies.
Mr. Tsai faces two lawsuits from the Securities and Exchange Commission for fraud. He denies the charges and has decamped to his native Taiwan, where, he says, he now helps build Subway sandwich shops.
To guard against fraud, Tremisis' funds have been put into an escrow account until a merger partner is found and approved by shareholders. If there's no deal within two years, investors get their money back, minus approximately $1 million in estimated expenses related to the search for a business. Tremisis management has also agreed to hold its shares in escrow for up to three years.
The surge of blank-check IPOs has certainly helped turn around the fortunes of Mr. Nussbaum, who did several such deals in the mid-1990s before being suspended from the securities industry for 30 days in 1997.
Ultimately, the firm that he was then running, GKN Securities Corp., was fined $725,000 and ordered to pay $1.4 million in restitution for charging excessive markups for blank-check companies and other securities that were sold only by GKN brokers. Mr. Nussbaum didn't admit to any wrongdoing.
Today, his new company, EarlyBirdCapital, is in growth mode, as is that of his local rival Broadband Capital. Manhattan-based Broadband is headed by Michael Rapp, a former stockbroker at Prudential Securities and PaineWebber, who converted to investment banking only four years ago, when he set up Broadband. Mr. Rapp, whose legal name remains Michael Rapoport, says he shortened his name "because I was tired of constantly having to spell it over the phone."
For investors, the underlying assumption with blank-check companies has always been that they are unorthodox--and, yes, risky--but that the rewards are high. History, however, suggests that is not the case.
Underwhelming performance
Even the performance of one of the relatively few success stories, Information Systems Acquisition Corp., offers little to excite investors. The company went public in 1993 at $6 a share and later merged with a closely held software company. It is now known as Neoware Systems Inc. and trades on the Nasdaq Stock Market.
After trading for $1 a share for several years in the late 1990s, the stock perked up to $21 last year, but since has come down to about $8.50 a share. At current prices, the stock has generated a 43% gain over 11 years--one that compares poorly with the 160% rise in the staid S&P 500 stock index over the same period.
But Mr. Tsai, the financier turned sandwich shop builder, advises staying away from blank-check deals. "I wouldn't recommend buying anything that trades on the Bulletin Board," he says.
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