Betting on Blank Check IPOs
Companies like to raise money first and decide what to do with it later. For investors, however, that can be tricky
JUNE 30, 2006
Investing
By Alex Halperin
Everybody wants a blank check. So-called blank check initial public offerings are in the midst of a renaissance, though they might not provide much of a thrill.
They work like this: A lone management team files to go public, planning to use the proceeds to buy a company. Investors in these IPOs are in effect wagering that management will be able to squeeze profits out of whatever company it chooses to acquire. At a time when profitable companies are stumbling out of the IPO gate, the idea of betting on a few dealmakers seems a bit counterintuitive. Nonetheless, the deals are thriving (see BusinessWeek.com, 3/23/06, "Are Blank Checks Bouncing Back?").
According to Dealogic, there have been 23 blank check offerings so far this year. In 2005, there were 29, a big jump from 2004 when only 13 were completed. So far this year, the deals have raised almost $1.7 billion, approaching last year's $2 billion. Blank check companies are also known as specified purpose acquisition companies, or SPACs.
It's an appealing proposition for a company to raise money first and figure out what to do later. In addition, Guy Lander, a securities lawyer with Carter, Ledyard & Milburn says it's a way for management to acquire a large stake in what they hope will become a profitable outfit. Plus, going public as a shell company is an easier route to market than actually building a company.
BUM DEAL? Humphrey Polanen, the CEO of SPAC Sand Hill IT Security, which has agreed to buy St. Bernard Software, says going the blank check route"provides access to capital which may not be available to people without a private equity track record."
Companies that have recently filed to raise money include East India Company Acquisition (See BusinessWeek.com, 6/26/06, "East India's Iffy IPO"), Millennium India Acquisition Company, and ChinaGrowth. While these outfits are clearly eager to link themselves to Asia's booming megamarkets, there are plenty of reasons for investors to shy away.
Richard Peterson, a senior researcher with Thomson Financial, says brokers "dangle these issues to retail investors." Looking at the stock prices, it's a bum deal. According to Thomson, blank check outfits that were offered in 2005 and 2006 are trading at an average of 7% below their asking price.
DOWNPLAYING THE RISK. This even applies to the more high-profile black check deals. In the year's biggest, Apple Computer (AAPL ) founder Steve Wozniak's Acquicor Technology (~~) raised $172 million in March. On June 29, it traded at $5.42, down about 10% from its offering price of $6.
At least during the pre-acquisition stage, blank check deals don't look like a strong addition to a portfolio, or bring in returns that IPO investors like to see. Lander says that sophisticated investors have some advantages. Underwriters, he says often minimize the risk involved, and might contribute some of their commission to the IPO infusion. Several firms that underwrite blank check deals, such as Morgan Joseph and Early Bird Capital, declined to comment for this story.
On the other hand, these stocks might work for some sophisticated traders. Polanen says that about 15% of each share price for Sand Hill IT constituted warrants that investors traded independently while the company searched for an acquisition. So, some investors could recoup their investment solely by trading warrants. In such cases, these traders "frankly wouldn't care what the management team came up with as a deal," Polanen says. Of course, if the company succeeds, they still have their piece.
PARTNERS WANTED. When blank check companies succeed in finding a partner—that is, a source of revenue—it doesn't necessarily mean a big payday for shareholders. In one of 2005's more hyped deals, Fort Lauderdale Services Acquisition (SVI ) raised about $127 million. In March, the company announced plans to acquire private smoothie chain Jamba Juice. The stock is currently trading at $9.97, up modestly from its offering price of $8.
A bet on a blank check company can turn sour for investors if the right partner is not found. And now, with even more deals in the pipeline, there's less money to go around. "Given the large supply of these deals," Lander says, "the window may be closing."
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