It is not a robust IPO market by any stretch of the imagination. But one type of company making an impressive resurgence in the IPO market is the special-purpose-acquisition company, or SPAC. About two dozen SPACs were completed in 2005 in the U.S., with another three dozen in registration; their total deal value was about $4.5 billion, and at the standard seven percent underwriting rate, the potential fee revenue for Wall Street from SPACs was a not-too-shabby $315 million.

Actually, SPAC is the new name for what was known in the early 1990s as a "blind trust." The new version works on the same principle, but numerous investor safeguards have been built into the structure after the first iteration proved prone to abuse and scandal. Such safeguards are important, since a SPAC requires a leap of faith on the part of investors. The "companies" are really legal shells with no operations; instead, they rely on experienced management to use the money raised by the IPO to shop for a company. Despite the safeguards, SPACs are still somewhat controversial.

David Menlow, president of, and a SPAC skeptic, says, "In any of these deals, you have to look at the individuals involved. It's essentially a poke-and-hope situation for investors. They say, 'We don't have access to making these deals, but hopefully [this management team] has access.'"

In fact, the new round of SPACs has attracted some experienced, or at least high-profile, managers. Some of these include former Apple Computer executives Steve Wozniak, Gilbert Amelio and Ellen Hancock, who founded Acquicor Technology; Richard Clarke, former counterterrorism official in the Bush and Clinton Administrations, who is leading Good Harbor Partners Acquisition Corp.; and Jonathan Cohen, the former, bearish Internet stock analyst at Merrill Lynch who was replaced by super bull Henry Blodget, who heads TAC Acquisition.

In term of safeguards, at least 85 percent of the money raised by a SPAC IPO must be put in a trust, unavailable to management until the actual acquisition. It's actually against the rules to look for something to buy before the IPO, so investors are truly in the dark about what company the managers will buy, except in broad terms, such as its industry or geographical region: financial services, natural resources or Asia. SPACs also have a time limit. A deal must be completed or announced within 18 months or the SPAC will be liquidated.

Deborah Quazzo, president and head of investment banking at ThinkEquity partners, which completed a SPAC in 2005 and has three in registration, says that one of the most important safeguards for investors is the ability to vote up or down on a proposed acquisition. Any deal requires approval by 80 percent of the shareholders. If no deal gets done in the required amount of time, shareholders get their money back (minus the 15 percent or so used for operations).

In a difficult IPO environment, Quazzo argues that SPACs play a valuable role in the capital markets. Going public is an expensive proposition, monetarily, emotionally and time-wise, she says. SPACs offer a way for solid, private companies to move into the public market without the onerous, attention-diverting job of taking themselves on extensive roadshows and pitching themselves to skeptical investors. "SPACs should and could be a piece of the capital-markets landscape, but they will ebb and flow with the IPO market," she says. In other words, the more robust the IPO market, the less private companies will need to turn to SPACs to access the public markets.

But Menlow, for one, is not convinced. He finds the inability to do fundamental analysis on a company going public anathema, and he also questions the insider benefits built into the SPAC structure. He points out that typically insiders buy their shares for less than a penny per share, while investors typically pay $6 each. Case in point, he says, was the Wedbush Morgan deal in August for Ad.Venture Partners. Insiders paid $1,000 for 2.25 million shares, while investors paid $54 million for nine million shares. That this information is disclosed does not make Menlow any more forgiving. "It's disgraceful," he says.

While in the past SPAC deals have been managed by lesser known investment banks, the potential underwriting fees in a tough IPO market are attracting the likes of Citigroup, which has one deal in registration, and Deutsche Bank, which has completed one deal with another in registration. "The reason [Citigroup and Deutsche] are doing it is because they can, but it tarnishes the entire business," says Menlow. "Any company can desire to go public, but that doesn't make it right."

Calls to Citigroup and Deutsche were not returned by press time.

Michael Sisk is a regular contributor to U.S. Banker. (c) 2006 U.S. Banker and SourceMedia, Inc. All Rights Reserved.

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