I have updated the blank check company (SPAC) information:
SUMMARY NOTES
Wall Street has never been bashful about recycling old products and concepts. One of the recent concepts to be recycled is the blank check IPO. Blank check companies are also known as Special Purpose Acquisition Companies (SPACS).
As of May 22, 2009, 161 SPACS have gone public since August 2003, raising gross proceeds totaling $21,967,690,655 (give or take a buck or two). Another 74 companies currently have registration statements on file with the SEC and are looking to raise $12,298,120,608 (once again, give or take a buck or two). If you back out the companies that filed their initial registration statements on or before December 31, 2007, there are 34 companies currently in registration that are looking to raise $5,160,000. Another 27 companies have filed and withdrawn registration statements; two of these companies subsequently went public on London’s AIM stock exchange, where they raised gross proceeds totaling $381 million.
66 companies have actually completed acquisitions, and another 19 have deals pending. Of the companies that have completed transactions, five have either been acquired or are in the process of being acquired. There are 45 companies that have failed to close on their proposed acquisitions and have either liquidated or are currently in the process of liquidating. These companies raised a total of $3,827,515,774 in their offerings. The shareholders of nine of these liquidated companies have extended the corporate charters for nine of companies so that they could operate as a shell. One of these companies has actually closed on a transaction.
There are 31 SPACS still looking for deals.
There have been several high profile transactions. The first was the acquisition of Jamba Juice Company by Services Acquisition Corporation International. Freedom Acquisition Holdings subsequently acquired GLG Partners and Endeavor Acquisition acquired American Apparel.
The first of the new crop of blank check companies went public on August 23, 2003.
PERFORMANCE
Of the 61 companies that have completed transactions and have not yet been acquired, the securities of only 6 of these companies are trading above their original offering price and 55 are trading below. The average company is down 54.59% versus an average decline of 23.49% for the Nasdaq Composite. The 5 companies that have either been acquired or are in the process of being acquired are down on average 85.93% versus an average decline of 17.81% for the Nasdaq Composite.
Of the 19 companies that have open deals, the securities of 7 of these companies are trading at or above their original offering price and 12 are trading below. The average company with an open transaction is up 0.08% versus an average decrease of 34.64% for the Nasdaq Composite. The securities of the companies still looking for a transaction have declined on 3.45% since their original offerings versus an average decrease of 33.83% for the Nasdaq Composite.
A note on methodology: When calculating the return percentages for each of the companies, I have added the current market value of the applicable common shares and warrants, subtracted the unit cost, and divided the resulting sum by the original unit cost. In those instances where companies have redeemed their warrants, for the warrant value I have used the value that was created through the exercise of the warrant. For example, in December 2007, HLS Systems International (originally Chardan China North Acquisition) redeemed its warrants. The common stock of HLS last traded at $5.20. If you assume that $.20 of value has been created from each of the two warrants (which had a strike price of $5.00 per share), the original units, which were priced at $6.00 and are no longer trading, now have a value of $5.60 ($5.20 + $.20 + $.20). The computation for calculating the return on HLS: $5.20 + $.40 - $6.00 = ($.40) divided by $6.00 yields a negative return of 6.67%.
I realize that the second calculation does not include the cost of exercising the warrants. If we add the exercise cost of the two warrants ($10.00) to the original cost of the unit ($6.00), our basis is $16.00. We now own three shares with a total value of $15.60. As an alternative, we could compute the return as follows: $15.60 -$16.00 = ($.40). ($.40) divided by $16.00 yields a negative return of 2.50%.
I am open to suggestions.
When calculating the returns on the Nasdaq Composite, I used the closing index price on the date prior to each of the individual offerings.
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A blank check company is a development stage company that has been formed for no specific purpose other than to complete a merger or acquisition with an operating entity, the identity of which is unknown when the company is formed. Because such transactions generally, but not always, trigger a change of control, with the shareholders of the acquired company now owning more than 50% of the combined entities, the majority of these transactions are accounted for as reverse mergers.
Blank check IPOs had a run of popularity during the 1980s. However, the abuses of that period, particularly the promotional activities of insiders looking to make a fast buck through the promotion of their stock rather than the acquisition of a viable business, led the SEC to place some significant restrictions on the practice.
The SEC has discouraged blank check IPOs with Rule 419, which regulates the issuance of “penny stock”, defined as shares priced below $5, by companies that are in the development stage. Rule 419 pertains to all companies with assets of less than $5 million. Because all of the recent offerings have been priced over $5 per unit and have each raised a minimum of $9 million in gross proceeds; the offerings have been exempt from the provisions of Rule 419.
The newly public blank check companies have been sensitive to the failures of their predecessors. To alleviate the concerns of potential investors, all of the recent offerings have voluntarily complied with most of the provisions of Rule 419 and the companies have been careful to structure the transactions so that the founders will not be in a position to enrich themselves at the expense of their new public shareholders.
Most of the funds raised in a blank check IPO are placed in a trust account and can only be released in the event that the company completes a business combination that wins approval from a majority of the company’s public shareholders. Depending on the individual company, a proposed transaction can be blocked if 20% to 40% of the non-insider shares are voted against the transaction. Regardless of the outcome of the vote on the proposed acquisition, dissenting shareholders have the option of having their shares redeemed in an amount that is equal to their pro rata share of the funds held in the trust account. If a transaction is not completed within a specified period that can range from eighteen to thirty months, the company will be liquidated with the proceeds distributed to the public shareholders. The insiders will not receive any of the proceeds.
All of these offerings have been artfully priced. Many of the early deals have been priced at $6 per unit, with each unit consisting of one share of common stock and warrants to purchase two additional shares of common stock at $5 per share.
Subsequent to the IPOs, the common shares have generally traded at a slight discount to their liquidation value. When investing in these securities, the conservative play is to invest in the common shares, which are generally trading at or near their liquidation value. The worst-case scenario: You get your money back. The more speculative route would be to buy the warrants.
I would encourage everyone to do some due diligence before purchasing any of these securities. They are speculative. Deals do crater before they are approved and there have been a lot of bad acquisitions. If you do purchase any of these securities, please do not allocate a significant portion of your investment portfolio. It might also be advisable to buy a basket of securities, rather than focusing on one company.
At the very least, the following risk factors should be taken into consideration:
-- Many reverse mergers fail. Companies that go public via this route generally do so because they would be unable to complete a traditional IPO. However, the magnitude of the dollars currently being raised in these offerings should mean that the newly public companies might be in a position to attract some decent acquisition candidates.
-- An investment in a blank check company is ultimately a bet that the management of the company will have the expertise to identify and close on the acquisition of a quality private entity. The last year has seen a significant upgrading in the management groups taking these companies public.
-- These securities are often very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.
Summary statistics – May 22, 2009
Message 25667151
Profiles of closed deals – May 22, 2009
Message 25667171
Summary information for companies with closed deals – May 22, 2009
Message 25667159
Profiles: Companies or assets of acquired – May 22, 2009
Message 25667184
Summary information for companies acquired – May 22, 2009
Message 25667180
Profiles of open deals – May 22, 2009
Message 25667194
Summary information for companies with open deals – May 22, 2009
Message 25667189
Summary information for companies without deals – May 22, 2009
Message 25667210
Summary information for companies still in registration – May 22, 2009
Message 25667213
Profiles of liquidated companies (terminated registrations) – May 22, 2009
Message 25667235
Summary information for liquidated companies (terminated registrations) – May 22, 2009
Message 25667229
Profiles of liquidated companies that will continue their existence as shells – May 22, 2009
Message 25667249
Summary information for liquidated companies that will continue their existence as shells – May 22, 2009
Message 25667243
Summary information for companies that have withdrawn their U.S. registration statements – May 22, 2009
Message 25667253 |
