The AP has an article on the SPACs, focusing specifically on the Liberty Lane filing. The article fails to note that one of the most significant SPAC related developments in the last year is the increase in the percentage of shareholders required to block a proposed transaction.
Liberty Lane Tries New SPAC Structure
By KRISTEN A. LEE 04.08.08, 6:03 PM ET
NEW YORK - Hedge funds trying to cash in on depressed shares of special purpose acquisition companies, or SPACs, may find that a new company's initial public offering changes the rules of the game.
Hampton, N.H.-based Liberty Lane Acquisition Corp., the first SPAC to be backed by Goldman Sachs (nyse: GS - news - people ), adds a bit more risk for investors by reducing the portion of investment they would get back if the blank-check company can't make an acquisition.
This is a crucial time for the SPAC market. First-quarter SPAC proceeds totaled $3.15 billion, compared with $1.48 billion in the first quarter of 2007. Excluding Visa Inc.'s blockbuster IPO, SPACs represented 68 percent of IPO proceeds during the quarter, said Renaissance Capital's IPOHome.com in a quarterly report.
The vulnerability of SPACs to hedge funds playing on share prices was spotlighted during the most recent market downturn this year, as the value of many SPAC shares fell below their value if the company liquidated.
Special-purpose acquisition companies, commonly known as "blank checks" are companies that go public in order to raise capital to make acquisitions.
When a SPAC goes public, nearly all the IPO proceeds are held in a trust until an acquisition is approved. If a SPAC fails to acquire a company within an allotted period of time - typically up to 2 years - nearly all of the investment is returned to shareholders.
According to Renaissance Capital, that conversion value is generally about 99.8 percent of the per-unit price paid on the offering, plus any interest.
The unintended consequence is that if the share price falls, investors may have a greater incentive for an acquisition to fail than they do for a deal to succeed. Renaissance Capital called this potential disconnect "the Achilles Heel of the SPAC structure."
Analysts say some hedge funds found an easy way to capitalize on the spread. They snapped up a stake in a cheap SPAC and then voted against an acquisition, forcing the company to liquidate. The hedge fund then pocketed the difference between the lower share price and the higher conversion price.
Three companies have announced liquidation so far in 2008, Renaissance Capital said. One such company is HD Partners Acquisition Corp. (amex: HDP.U - news - people ) Shareholders approved the company's liquidation on Tuesday after rejecting its proposed acquisition of the National Hot Rod Association's professional racing assets.
In its prospectus, Liberty Lane said its structure was designed to "better align the incentives of our initial stockholders with the interests of the long-term investors we seek."
The $350 million IPO is the first SPAC offering to be underwritten by Goldman Sachs, the only major investment bank that has delayed jumping into the SPAC market.
The biggest change is that the company plans to keep less of the IPO's proceeds in trust than most other SPACs. Rather than 99.8 percent, Liberty Lane will hold 97.4 percent of the proceeds in trust.
At the same time, Liberty Lane insiders are investing only 1 percent of the total proceeds in exchange for 7.5 percent of the company's stock after the IPO. Traditionally, insiders have invested a larger share of the proceeds in exchange for a 20 percent stake.
Renaissance Capital said the "true advantage of the structure is that it wards off those hedge funds interested in earning a yield."
However, this new structure also increases the risk to pre-acquisition investors. "Ultimately, you have less money to reclaim if you want to get out," said Renaissance Capital analyst Matt Therian.
It remains to be seen if this new structure will hold the same appeal for investors. "It does become a less risky proposition for management when they build in these provisions, but the flip side is that as a shareholder pre-acquisition, you have less protection," Therian said.
Liberty Lane's management team are former top executives of Fisher Scientific International Inc., a maker of scientific equipment and instruments. The company merged with Thermo Electron Corp. (nyse: TMO - news - people ) in 2006 to form Thermo Fisher Scientific Inc.
The company said its management team executed more than 60 acquisitions for Fisher Scientific.
Analysts and investors will be watching the Liberty Lane deal closely to see if a SPAC can thrive under this new model. "It's going to shed light on whether there is an appetite among investors to treat SPACs as management wants them to be treated," Therian said.
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