Business Buffet
When hungry investors want to make a meal of a company, they can pool their millions in something called a SPAC
You may think that "SPACs" sound like something to keep your feet dry or the kind of gift sure to be returned. But for investors hoping to make a killing on a leap of faith, special purpose acquisition companies are hot commodities.
SPACs are publicly traded shell companies, meaning they have no business operations and exist as little more than a name until investors pump money into them. The payoff comes if a SPAC's management team is savvy enough to purchase an undervalued private company within a specific field--like shipping--and then run it successfully as a public company. In a perfect world, that private company would be bought at a fraction of what it is later valued at on the public market.
Such investment vehicles have been luring some big names. Steven Berrard, the former CEO of Blockbuster Entertainment Group, now heads a SPAC called Services Acquisition Corp. International, and Apple Computer cofounder Steve Wozniak is helping shepherd another SPAC called Acquicor Technology. A few top banks have also begun underwriting the deals, including Citibank and Deutsche Bank. The latter recently priced a 20 million-share offering for a real-estate SPAC called Cold Spring Capital, raising $120 million.
In all, more than 50 SPACs filed to go public in 2005. About half of these, including Cold Spring Capital, have made it to market, raising around $1.2 billion that can be used for acquisitions. By comparison, only 11 deals went public in 2004, and those raised less than $500 million.
The special units have some obvious benefits for underwriters and venture capitalists--fat fees and a cut of the action at a discount. Other insiders, like the officers and directors of the SPAC, can accumulate a lot of the stock for cents on the dollar. Meanwhile, hedge funds are attracted to the upside inherent in the deals if the SPAC team finds a good undervalued private company to take public, as well as the cash on hand prior to the acquisition. For the acquired company, merging into a SPAC helps it gain access to public financing in less time and with far less cost than if it attempted its own initial public offering.
The wrinkle. For other shareholders, it's more of a gamble. They are putting their trust in a management team, expecting it to both find hidden assets and run them well. Other than the possibility of fraud, that is perhaps the most serious wrinkle in a SPAC and the toughest thing for outside investors to gauge. "Just because you run IBM, for example, doesn't mean you are exceptional at acquiring companies," says Sheldon Goldman, senior managing director at Sunrise Securities, one of the most active SPAC underwriters.
But Goldman adds that the investment units are attractive to a lot of investors, particularly the institutional kind, because they offer more control than can be had in the private equity market and because SPACs allow large investors to tailor their exposure to specific industries. "You want coal? I can show you coal with a specific management team," he adds. "And there is downside protection, so if you don't like the deal, you walk."
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