SPACattack

Special purpose acquisition companies (SPACs) have burst onto the M&A scene, and whether they ultimately make a ripple in the market or not, these structures have generated an enormous amount of talk.

SPACs seem to have emerged from the obscure peripheries of Wall Street – industry insiders are unfamiliar the banks underwriting SPACs; the managers overseeing SPACs can't be described as famous; the hedge funds investing in these relatively new vehicles – well, they do everything they can to keep in the shadows. However, nearly everyone in the investmentmanagement industry has at least been given the SPAC sales pitch.

A SPAC is essentially a shell company that is floated publicly with designs to acquire a private business through a reverse merger, providing a side entrance for the target company into the public market. Generally speaking, around 85 percent of the proceeds from a SPAC's IPO offering are used for the acquisition, and the shell company typically has to complete a deal within 18 to 24 months before the vehicle is liquidated and the invested capital is returned.

EarlyBird Capital, ThinkEquity and FTN Midwest Securitiesare among the bigger names that have been underwriting these vehicles. Some of the more notable players involved with SPACs include former Apple cast-off Ellen Hancock and Robert Hellman, the head of buyout firm McCown De Leeuw & Co.

For some private equity participants, SPACs seem a suspicious fad and the invention of investment bankers. One lawyer who has looked into the structure tells PEM bluntly,?They're all these Boca Raton [Florida] underwriters. I've never even heard of them?Who knows how these [SPACS] will do, but to me it looks like they'll be tying two rocks together just to see if they float.?

Don't tell this to the many recent SPAC converts, though. According to those that have embraced the structure, headway is just now starting to be made, and the numbers would seem to confirm this. A private equity alert published by law firm Weil, Gotshal & Manges at the end of October indicated that in 2005, 49 SPACs have filed to go public, with 19 SPAC IPOs having already been consummated. Moreover, the acquisitions are now starting to be completed. At the end of August, International Shipping Enterprises, which floated as a SPAC last year in a $171 million IPO, completed a $600 million-plus reverse merger with Navios Maritime Holdings.

Perhaps the most salient sign that SPACs are gaining acceptance is thatWall Street is finally starting to do business in the space. Deutsche Bank Securities recently signed up as the lead underwriter for Cold Spring Capital, a financialservices dedicated SPAC, and one SPAC manager says another major bank has been in discussions regarding its entry into the market as well.

THE PITCH
The three primary selling points to the SPAC essentially creates a triangle connecting the investors, who stand to benefit the most, with the management and target companies involved.

The public shareholders capitalizing the SPACs assume the power seat in the relationship. They have the benefit of downside protection, with most of the proceeds from the IPO going into a blind trust. If investments don't materialize, the IPO backers get a significant chunk of their investment back – generally in the 90 percent range. Also, the shareholders are given the right to block an investment, and if as little as 20 percent of the shareholders are in dissent, a proposed deal can be blocked.

From the perspective of the target companies, the SPAC provides businesses with an alternative source of capital. Ostensibly, reverse mergers are not subject to the whims of the IPO market, and according to some, the terms are more appealing and time frame quicker than the typical private equity deal. Itmay be up for debate, but SPACs are being billed as an ideal exit route for private equity investors. They provide liquidity regardless of the market's temperature, and can allow for additional upside, just as a traditional IPO would.

The SPAC management team, however, is the party with potentially the most downside. They're not paid unless the reverse merger actually happens, so if two years go by and the SPAC is liquidated, it ends up being a zero-sum gain for the management team. The upside, of course, is the ability for entrepreneurs to tap public money to pursue private visions.

Ilan Slasky, who heads media and communications-focused SPAC Ad. Venture Partners tells PEM that for the management, the SPAC is the ultimate bet on oneself.?The only form of compensation is tied directly to the entity's success? But we believe in ourselves and we believe in the structure,?he says.

SPACS IN REGISTRATION AND POST-IPO

SPACS THAT HAVE COMPLETED ACQUISITIONS