SPAC Attack

January 13th, 2008 · 1 Comment · Print This Post

Here comes the attack of the more nimble SPAC’s (Special Purpose Acquisition Corp.) These are a relatively new twist to a very old concept which were previously called blank check companies. There are no business operations inside the corporate entity just the construct of a company such as shareholders, capital, management and a publicly traded entity. However, SPAC’s differ greatly from their former brethren because they have structured these new vehicles to be more transparent as well as being very investor friendly. SPAC’s are a way for “John Q Public” to basically get involved with private equity deals while still having the ability to exit through the sale of shares in the open market.

So how do you decide what SPAC is good?? Well, considering management is really the driver behind what type of company will ultimately end up being acquired it would be best to look at their respective track records. Here is a checklist of questions that you should go through when considering any SPAC investment:

Does management have depth in the space they are looking to make a deal?
Does management have a vested interest, meaning did they pay into the SPAC in order to earn their promote (the promote is the incentive equity management will receive once an acquisition has been completed)?
Do they have a previous experience in mergers and acquisitions?
Do the underwriters have a good track record in actually having the SPAC’s successfully merge with an acquisition candidate?
If they do, what has the share price done since the acquisition?
Do the underwriters have good research departments that can follow these newly formed companies?
Last but certainly not least what area is the SPAC targeting for acquisitions?

If it is an area that generally does not have a high success rate then the capital may be tied up for a period of time or the SPAC may never end up doing a deal and the capital would be returned and this is bad because it is an opportunity cost.

Having just attended an excellent SPAC conference in San Francisco and seeing the amount of interest from the investment community, I can say that SPAC’s will become much more prevalent in the next 12 months. The only hitch could be that if a higher percentage of deals have to return capital because they could not find a suitable transaction that will cast a shadow on SPAC’s future. Time will tell if SPAC’s are just the newest flavor of the investment banker’s financial alchemy or if they are truly a newer better form of capital structure.

Bookmark It