The Nasdaq Welcomes SPACs
Proposes change to list special purpose acquisition companies
March 3, 2008
The Nasdaq Stock Market is aiming to tap into the lucrative initial public offering market for special purpose acquisition companies (SPACs), proposing a rule change to the Securities and Exchange Commission in order to list blank check companies.
SPACs are shell entities that raise capital through initial public offerings, using the proceeds to acquire one or more operating companies. The investment vehicles, historically formed by experienced corporate executives, have drawn their share of limelight over the last few months. High profile financiers like Bruce Wasserstein, Joseph Perella, Thomas Hicks, Nelson Peltz and Ronald Perelman have all formed new blank check companies as SPACs are also called.
Besides the cachet these marquee names carry in the financial world, SPACs accounted for 25% of IPOs in 2007 and made up more than $10 billion of issuance volume. Nowhere was the new issues action hotter than on the American Stock Exchange where 50 blank check companies went public.
"We have a three year head start on the competition," says Robert Wotczak, managing director and head of equities at the AMEX. "We've clearly demonstrated the ability to efficiently review and list these SPACs over the last three years," he adds.
The AMEX is, without a doubt, the 800-pound gorilla in US exchange SPAC offerings. It was the first major exchange to pioneer the public listing of blank check companies in the US. In 2006, the AMEX listed its first blank check company, Community Bankers Acquisition, and followed a year later with its second listing, Shanghai Century Acquisition.
Despite its strong market position some SPACs that have executed acquisitions have switched their listings over from the AMEX to the Nasdaq because of its highly liquid electronic trading platform and strong brand name. The Nasdaq lists 3,200 companies and handles trades of around 2 billion shares daily.
On Feb. 1, a blank check company named Information Services Group began trading its stock and warrants on the Nasdaq.
The move doesn't surprise Bob McCooey, senior vice president in charge of new listings at the Nasdaq.
"We have a compelling value proposition in terms of the products and services we've built out for issuers," McCooey says.
He also says a number of other SPACs, which have previously carried out acquisitions, have listed on the Nasdaq since the year began. As such, they are classified as operating companies, meaning they can trade on the exchange. The Nasdaq's existing rules don't allow blank check companies without assets to trade on the exchange.
"I think it's more attractive to investors, it offers more liquidity and, some would say, a better brand name," says Thomas Friedmann, a partner at Dechert, commenting on the Nasdaq's attractiveness.
Not every AMEX-listed SPAC is keen on jumping ship, at least in the near term. Media and Entertainment Holdings chief financial officer Robert Clauser points out: "We're perfectly happy where we are."
Clauser admits, however, the company's position could change once it makes an acquisition.
The Nasdaq's proposed rules stipulate that blank check companies must deposit IPO proceeds into an escrow account, complete one or more acquisitions that are approved by shareholders, and a majority of board members within 36 months, versus the standard 24 month time frame.
Nasdaq's proposed standards for SPACs doesn't impress the AMEX's Wotczak who says its own due diligence standards have met the approval of regulators and investors, not to mention key legal and investment banking institutions active in the SPAC area. "What the Nasdaq is proposing is really pretty much a mirror of what we're [already] doing," he says.
Private equity executives, hampered by problems in the subprime market, turned to the formation of SPACs to consummate deals without the burdens of the debt market, according to Wotczak. "It's becoming increasingly difficult to borrow money from the banks because of the subprime shakeout," he says, adding the market has "put the pedal to metal for private equity firms to raise money."
Indeed. The sponsorship of blank check companies by experienced and well-heeled financiers spread like a California wildfire through the investment community in the latter half of 2007.
Financial sponsors are also looking at SPACs as an avenue for selling portfolio companies, say Clauser and others. "We're starting to see more activity where private equity groups are interested in SPACs as an exit," Clauser says.
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