By Elizabeth Hester
The trouble is that investors who have spent $18 billion since 2003 on U.S. initial public offerings by such shell companies would have been better off holding a mutual fund that tracks the Standard & Poor's 500 Index.
While some special-purpose acquisition companies do rise, such as the 98 percent gain last year by the units of Nicolas Berggruen's GLG Partners Inc., the average annual return of the past five years has been 5.8 percent, according to SPAC Analytics, a Turks & Caicos-based independent research service. The S&P 500 advanced 13 percent annually in the same period.
``It seems as if everybody is raising a SPAC,'' David Rubenstein, co-founder of the Washington-based private-equity firm Carlyle Group, said last month at an industry conference in Dubai. ``The jury is still out as to whether these are good things other than for the investment bankers who raise them.''
The securities industry raised $11.7 billion last year for the special-purpose acquisition companies, an almost fourfold increase from 2006, data compiled by Bloomberg show. Billionaire dealmakers Ronald Perelman and Nelson Peltz plan to bring in a combined $1.25 billion before the end of March with SPACs.
Hicks Sale
The surge in SPACs coincides with a decline in leveraged buyouts. LBOs all but disappeared in the second half of 2007 as borrowing costs almost doubled from June to December, Merrill Lynch & Co. data show. U.S. buyouts fell to $103.2 billion in the second half from $322.4 billion in the first six months of the year as the subprime-mortgage market collapsed.
SPACs sell units, usually one share of common stock and one warrant, and use the money to buy a closely held company. They were dubbed blank-check companies because they don't disclose their targets before the IPO. Any takeover must be approved by at least 70 percent of the SPAC's shareholders. If a purchase isn't completed within a set time, usually two years, the money is returned to investors, minus incurred operating costs.
Thomas Hicks, the leveraged buyout pioneer and owner of the Texas Rangers of Major League Baseball, raised $552 million for Hicks Acquisition Co. I in September.
``I plan to use the vehicle to try to build three or four or five significant companies over the next five to 10 years because it's permanent capital,'' Hicks, 61, said in an interview from his office at Hicks Holdings LLC in Dallas. ``Once you make an acquisition, that entity has the ability to continue growing both internally and by acquisitions because it will be very lightly leveraged compared to leveraged buyouts.''
Sluggish Performance
Hicks Acquisition has declined 1 percent in American Stock Exchange composite trading since the IPO. Hicks Acquisition has yet to announce a takeover.
SPAC shares often languish until a deal is disclosed. Returns for blank-check companies that have announced but not completed a purchase have averaged 14.6 percent a year, while those still looking have gained 4.6 percent, according to SPAC Analytics.
After a purchase, the shares trade on the fundamentals of the operating company such as earnings and sales growth. SPACs that have completed their initial transaction rose by an average of 3.7 percent a year.
Services Acquisition Corp. International, sponsored by former Blockbuster Inc. Chief Executive Officer Steven Berrard, raised $138 million in June 2005 in an IPO underwritten by Broadband Capital Management LLC. In March 2006, the SPAC said it would buy juice-smoothie retailer Jamba Juice Co.
Bankers' Fees
Services Acquisition climbed 56 percent from the announcement until the closing date the following November. Since the deal was completed, San Francisco-based Jamba's shares have dropped 77 percent amid rising costs and sales that fell short of forecasts.
Wall Street earned more than $770 million by selling shares of 64 SPACs last year, up from 36 offerings in 2006. The fees helped securities firms offset a 1.2 percent decline in revenue from conventional IPOs, data compiled by Bloomberg show. Underwriting also puts banks in line for advisory business when SPAC clients are ready to pursue takeovers.
Citigroup Inc., the largest U.S. bank by assets, managed its first SPAC IPO in 2005 and ranked No. 1 last year among blank-check underwriters, Bloomberg data show. The New York- based firm earned $302.8 million in fees, ahead of second-ranked Deutsche Bank AG's $92 million. Deutsche Bank is based in Frankfurt.
`Cash Vehicle'
Citigroup probably will report a fourth-quarter loss of $4.2 billion, or 83 cents a share, after writedowns of subprime- related securities, according to a survey of 17 analysts by Bloomberg.
Morgan Stanley, the second-biggest securities firm by market value after Goldman Sachs Group Inc., and No. 5 Bear Stearns Cos. also reported losses during the worst U.S. housing slump since the 1991 recession. All the companies are based in New York.
Citigroup's SPAC clients include Hicks; Jonathan Ledecky, the former CEO of Washington-based U.S. Office Products Co.; and former hedge-fund manager Berggruen.
Berggruen, 46, raised more than $1 billion in the IPO of Liberty Acquisition, the largest SPAC to date. His previous SPAC, the $528 million Freedom Acquisition Holdings Inc., took New York-based hedge-fund manager GLG Partners public on Nov. 2. GLG units rose 31 percent since the deal was announced in June.
``We felt in this environment that having a cash vehicle would really give us a competitive advantage,'' said Jared Bluestein, chief financial officer of New York-based Berggruen Holdings Ltd. ``The ability to do deals without a high degree of leverage will always be an attractive opportunity for both buyers and sellers.''
Blank Checks
Fees for underwriting SPACs are 6.6 percent of assets raised, compared with the 6 percent average for all IPOs in the U.S., Bloomberg data show. SPAC share sales accounted for 21 percent of dollars raised last year in the U.S. IPO market.
Since the start of 2003, 144 blank-check companies have sold shares, raising $18.1 billion with 13 of the deals coming before 2005, according to SPAC Analytics.
As the largest Wall Street firms began underwriting SPACs, it attracted bigger names and prompted investors to pile more money into the vehicles. The average capital raised in 2007 IPOs was $183 million, up from $76.4 million in 2005, SPAC Analytics data show.
Perelman and Peltz
Perelman, the 65-year-old chairman of skin-care company Revlon Inc., has filed to raise $500 million for MAFS Acquisition Corp. The New York-based investor also brokers deals through his closely held holding company, MacAndrews & Forbes Holdings Inc., and M&F Worldwide Corp., which trades publicly.
Peltz, who's known for putting pressure on the managements of companies including ketchup-maker H.J. Heinz Co. to improve shareholder value, is seeking $750 million for New York-based Trian Acquisition I Corp. The IPO is scheduled for Jan. 21. Peltz, 65, separately won clearance from regulators last week to buy a stake of New York-based insurance broker Marsh & McLennan Cos.
Peltz and Perelman declined to comment.
Other newcomers to the SPAC club include Barry Sternlicht, the 47-year-old founder of White Plains, New York-based Starwood Hotels & Resorts Worldwide Inc.; mergers advisory firm Lazard Ltd., run by Bruce Wasserstein, 60; and rival bank Greenhill & Co. Lazard and Greenhill are based in New York.
Different Than LBOs
``We're looking to back proven people,'' said Whitney Tilson, who manages about $160 million at T2 Partners LLC in New York. ``It's a much better deal than investing in your typical LBO fund. In your typical LBO fund you're locked up for 10 years and you can't give thumbs up or thumbs down on a deal by deal basis.''
Buyout firms raise money privately, returning profits from their deals to investors over seven to 10 years. LBO funds range from several hundred million dollars to the record $21.7 billion gathered by New York-based Blackstone Group LP last year.
Since SPACs sell shares with the goal of buying an existing company they haven't yet identified, IPO investors are betting on the ability of the executives to find a suitable target.
Context Capital Management LLC, a hedge-fund firm with about $700 million of assets, is creating a new pool to buy SPACs. The company, which has offices in San Diego and Stamford, Connecticut, aims to raise $300 million, said William Fertig, Context's co-founder and co-chairman.
Credit Risk
``The market opportunity is enormous because the asset class has grown so dramatically,'' he said. ``It could be a billion- dollar opportunity.''
Even if a SPAC can't find a business to buy, investors will most likely break even since almost all the money raised is held in a trust account, Fertig said.
``There is very little credit risk associated with a SPAC because most of the proceeds are held in trust,'' he said.
SPAC founders have much to like about the deals since they'll own part of a publicly traded company once a purchase is completed.
``It's a great deal for the sponsor because they get 20 percent of the company,'' said Steven Kaplan, a finance professor at the University of Chicago Graduate School of Business. ``If a deal doesn't go through, everyone gets their money back. That's pretty good: heads I win, tails I'm even.''
