The SPAC Market Takes a Breather
After nice run, 'blank check' sector stumbles; is the market already saturated?
By Kelly Holman April 14, 2008
When HD Partners Acquisition notified the Securities and Exchange Commission, and thus the world, that it was dissolving after its shareholders voted against its purchase of racing assets from the National Hot Rod Association, its impending demise raised another question mark about the special purpose acquisition company market.
New research indicates the acquisition company IPO market isn't expected to be overly robust in 2008, according to Palo Alto, Calif.-based SPAC Research Partners. The research firm expects the number of acquisition companies going public in 2008 will decline 10%, while 25% of all SPAC acquisitions are expected to be vetoed by shareholders in 2008.
Moreover, 90 blank check companies have registered to go public since the beginning of the year, but only 12 have done so, according to SPAC Research.
The market is at a standstill, says Michael Tew, senior analyst at SPAC Research Partners. "There are a lot of deals at risk right now because structured buyers [shareholders] will vote against them or because they're not good deals," he says.
SPAC Research has concluded that two planned acquisitions could see changes in their terms: Alternative Asset Management's $974 million purchase of Halcyon Asset Management, which the firm's research indicates has a 33% chance of closing, and Marathon Acquisition's $1 billion acquisition of Global Ship Lease from French shipping company CMA CGM, which has a 40% chance of being completed at its current terms.
Tew, who also runs a financial advisory firm named Sand Hill Research Partners, says macroeconomic issues may influence the attractiveness of companies that might otherwise be good acquisition candidates.
SPAC Research found that the average size of SPAC offerings is expected to increase by 45% in 2008 to $265 million with many SPACs raising anywhere from $300 million to $500 million. By comparison, last year's average blank check company raised $183 million.
The blank check market is also anticipated to increase 21% annually over the next five years and generate $32 billion in IPO volume, according to SPAC Research.
The ability of SPAC managers to find willing investors, though, has created another dynamic, says one industry observer familiar with the industry.
"Right now there are so many SPACs out there looking for deals it's like you're investing in a market that's already saturated," says James Abbott, a partner in the corporate finance department of Seward & Kissel.
Seward & Kissel co-advised Marathon Acquisition, the SPAC established by former Apollo Global Management executive Michael Gross, on its recent $1 billion agreement to acquire Global Lease.
Abbott says blank check companies, as they are also called, are providing both an avenue for private equity firms to exit portfolio company investments, as well as creating more competition for M&A deals. The attorney says acquisition companies are increasingly showing up in investment-banking auctions, competing with corporate and financial buyers.
The once-questionable SPAC model has certainly won clout with the banking community in recent years as investor safeguards have been further refined. Now, once an acquisition company goes public at least 90% of IPO proceeds are placed in a trust where they'll remain until an acquisition is approved or an acquisition company is liquidated. If the blank check company doesn't consummate an acquisition within its allotted time frame, which now ranges up to 36 months, then that money must be returned to shareholders.
The acquisition companies have proven enticing enough to draw high flying financial executives like Bruce Wasserstein, Joseph Perella, Thomas Hicks, Nelson Peltz and Ronald Perelman to launch their own SPACs, attracting large investment banks like Citigroup and Deutsche Bank, two strong SPAC underwriters, and more recently Goldman Sachs, which carried out its first SPAC underwriting on behalf of Hampton, N.H.-based Liberty Lane Acquisition.
One major player outside of the bulge bracket is Morgan Joseph, which has managed 20 SPAC IPOs since 2005 and plans to hold its first conference on the asset class later this month in New York.
Both the Nasdaq and New York Stock Exchange have petitioned the SEC to allow the listing of acquisition companies, following in the footsteps of the American Stock Exchange, the exchange that pioneered the listing of SPACs when it listed Community Bankers Acquisition in 2006. Last year, the AMEX racked up 50 such IPOs, which accounted for $10 billion of new issue market volume in 2007.
Despite their apparent comeback SPACs haven't historically generated great returns once an acquisition has been made. SPACs that have completed acquisitions since August 2003 posted a 6.9% decline on average.
The SPACs that succeed are the ones, of course, where price erosion doesn't come into the picture.
"If the SPAC does its merger and its stock trades up in the public market then it's worked out well for everyone," says Seward & Kissel's Abbott.
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