The IHT takes a look at Michael Gross' predicament:
And therein may lie the ultimate problem with this new tool of capitalism: The incentives to do a deal are pretty perverse. As a result, companies that have no business being public may soon be getting ticker symbols.
The poor man's private equity: Gambling on unknown IPOs
By Andrew Ross Sorkin
Published: February 12, 2008
Here's an odd dilemma: You have to spend $320 million in the next 14 days, or it all goes poof.
That's the predicament Michael Gross, a co-founder of the big private equity firm Apollo Management and a director of Saks, has found himself in. And a similar conundrum could face a string of other big name gamblers on Wall Street: Ronald Perelman, Bruce Wasserstein and Nelson Peltz, among them.
Gross, a 46-year-old entrepreneur with a penchant for shoot-for-the-moon risk, is one of dozens of deal makers who have recently piled into an obscure corner of Wall Street - one of the few places amid the market meltdown where money is still gushing in.
If you have not heard about this little netherworld, you will: It is called - and please do not let your eyes glaze over this alphabet soup of an acronym - SPACs, short for Special Purpose Acquisition Companies. In the 1990s, a variation on the same idea was called a "blank check" company.
Think of it is as a publicly traded buyout fund - or perhaps, more accurately, the poor man's private equity. Average Joes finally get access to Masters of the Universe - at least that is the sales pitch. Perelman, Wasserstein and Peltz have all started their own SPACs or are in the process of doing so.
Here's how it works: Average Joe buys shares in an initial public offering for an investment company with no assets to speak of other than the pot of money from the IPO. The company's sole mandate is to make one big acquisition. Average Joe has no idea what it will buy.
And frankly, neither do the folks running the investment company. It's a blind bet that the Masters of the Universe will live up to their name.
Of course, there is a catch (there is always a catch), and here is where Gross enters the picture: These investment companies have only 18 months to 24 months to find something to buy with all the money they raised and get shareholders to sign off on the acquisition.
If the investment company cannot find an acquisition, it must dissolve itself and give the money back to shareholders, less the costs it incurred on its failed hunting expedition for a takeover target. (Not a bad insurance policy.)
Gross started a SPAC called Marathon Acquisitions and raised $320 million in the summer of 2006.
Take a look at the calendar: His 18 months are almost up. Starting Tuesday, he has exactly 14 days left; that's only 10 business days. (But who is counting?)
Maybe he was diddling for too long, but whatever the case, he has not found anything to buy - at least he has not said so publicly. (He has been hinting to friends that he might pull a rabbit out of his hat at the 11th hour.)
Gross, who declined to comment, was at one point so desperate to buy something - anything - he told bankers on Wall Street and his friends that he was prepared to offer a $15 million reward to find a successful acquisition target.
For him, not only will his chance of a big deal fall apart, he will be out about $5.5 million of his own cash that he put into the deal. (Unlike regular shareholders, principals do not get their money back.)
And therein may lie the ultimate problem with this new tool of capitalism: The incentives to do a deal are pretty perverse. As a result, companies that have no business being public may soon be getting ticker symbols.
The way guys like Gross get paid is by making sure they can get a deal across the finish line - not necessarily how great an investment it turns out to be five years later.
If Gross can persuade shareholders to give the deal the thumbs-up, he gets - are you sitting down? - 20 percent of the entire company.
That is a lot more than the 20 percent of the profits that private equity folk take for at least ostensibly improving a company. And all he has to do is hold onto his shares for six months to a year after the deal is complete before he is free to dump his shares.
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