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Special Purpose Acquisition Company ( SPAC )

http://en.wikipedia.org/wiki/Special_purpose_acquisition_company



Special purpose acquisition company
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Special Purpose Acquisition Corporations (SPACs) are investment vehicles that allow public investors to invest in areas sought by private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of an initial public offering (IPO).

Contents [hide]
1 Characteristics
2 SPACs and Reverse Mergers
3 Regulation
4 Advantages
5 Disadvantages
6 Historical and Recent Developments
7 Independent Research Coverage
8 Sell Side Research
9 Statistics
10 Some Successful SPACs
11 SPAC Players
12 See also
13 External links



[edit] Characteristics
SPACs were traditionally sold via an initial public offering (IPO) in $6 units consisting of one common share and two "in the money" warrants to purchase common shares at $5 a common share at a future date usually within four years of the offering. Today, SPAC offerings are more commonly sold in $8 units which consist of one common share and one warrant or $10 units with one common share and one warrant. SPACs trade as units and/or as separate common shares and warrants on the OTC Bulletin Board and/or the American Stock Exchange once the public offering has been declared effective by the SEC, distinguishing the SPAC from a blank check company formed under SEC Rule 419. Trading liquidity of the SPAC's securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.

By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 98% to 100%. The SPAC must sign a letter of intent for a merger or an acquisition within 12/18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 12/18 months, the SPAC can close the transaction within 24 months. Today, SPACs are incorporated with 24-month limited life charters that require the SPAC to automatically dissolve should it be unsuccessful in merging with or acquiring a target prior to the 24 month anniversary of its offering. Emerging market focused SPACs, particularly those seeking to consummate a business combination in China have been incorporating a 30/36 month timeline to account for the additional time that it has taken previous similar transactions to successfully close their business combinations. In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition and a majority of shareholders voting must approve this combination with usually no more than 20% to 40% of the shareholders voting against the acquisition and requesting their money back. In order to allow stockholders of the SPAC to make an informed decision on whether or not they wish to approve the business combination, full disclosure of the target business including complete audited financials and terms of the proposed business combination via an SEC merger proxy statement is provided to all stockholders. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange which do not have the aforementioned voting thresholds. In July 2007, Pan-European Hotel Acquisition Company N.V. was the first SPAC offering listed on the Euronext Amsterdam exchange raising approximately €100 million.

As a result of the voting and conversion rights held by SPAC shareholders, only well-received transactions are typically approved by the shareholders. When a deal is proposed, a shareholder has three options. The shareholder can approve the transaction by voting in favor of it, elect to sell their shares in the open market, or vote against the transaction and redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool - blank check companies of the 80’s, which were a form of limited partnership that do not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within 24 months of the initial offering. This guarantees a minimum liquidation value per share in the event that a business combination is not effected.

The SPAC is usually led by an experienced management team composed of three or more members with prior M&A and/or operating experience. Management teams typically have developed a network of relationships in the investment community and have demonstrated an ability to create value for their shareholders. Some of the well-known individuals that have raised funds via a SPAC public offering include Richard Heckmann, Dan Quayle, Lou Holtz, Jonathan Ledecky, Eric Watson, Larry Coben, William Mack, Robert Baker, Warren Lichtenstein, Tom Hicks, Alfred C. Eckert III, Nicolas Berggruen, Martin E. Franklin, John Scully, Michael Gross, Steven Berrard, Wesley Clark, Steve Wozniak, Gil Amelio, and C. Thomas McMillen. Recently filed SPAC offerings include management teams led by individuals such as Ronald O. Perelman, James V. Kimsey, David Chu, Barry S. Sternlicht, Michael E. Martin, Joe Perella, Jay Nydick, Jason Ader, Nelson Peltz, Peter W. May, Edward P. Garden, Warren Kanders, Donald Drapkin, James N. Hauslein, Hank Aaron, Mario Cuomo, Lawrence Stroll, Joel Horowitz and John Catsimatidis. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2-3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 3% to 5% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation. No salaries, finder's fees or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fudiciary duties. The SPAC is further prohibited from consummating a business combination with any entity which is affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.

Since the 1990s, SPACs have existed in the technology, healthcare, logistics, media, retail and telecommunications industries. However since 2003, when SPACs experienced their most recent resurgence, SPAC public offerings have sprung up in a myriad of industries such as the public sector, mainly looking to consummate deals in homeland security and government contracting markets, consumer goods, energy, energy & construction, financial services, services, media, sports & entertainment and in high growth emerging markets such as China and India.


[edit] SPACs and Reverse Mergers
A SPAC is similar to a reverse merger. However, unlike reverse mergers, SPACs come with a clean public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place, a built-in institutional investor base and an experienced management team. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies in reverse mergers.

SPACs typically raise more money than reverse mergers at the time of their IPO. The average SPAC raises about $115 million through its IPO compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs also raise money faster than private equity funds. The liquidity of SPACs also attracts more investors as they are offered in the open market.

Hedge funds and investment banks are very interested in SPACs because the risk factors seem to be lower than standard reverse mergers. SPACs allow the targeted company’s management to continue running the business, sit on the board of directors and benefit from future growth or upside as the business continues to expand and grow with the public company structure and access to expansion capital. The management team members of the SPAC will typically take seats on the board of directors and continue to add value to the firm as advisors or liaisons to the company's investors. After the completion of a transaction, the company usually retains the target name and registers to trade on the NASDAQ or the New York Stock Exchange.


[edit] Regulation
The SPAC public offering structure is governed by the Securities and Exchange Commission (SEC). A public offering for a SPAC is typically filed with the SEC under an S-1 registration statement (or an F-1 for a foreign private issuer) and is classified by the SEC under SIC code 6770 - Blank Checks. Full disclosure of the SPAC structure, target industries or geographic regions, management team biographies, share ownership, potential conflicts of interest and risk factors are standard topics included in the S-1 registration statement. It is believed that the SEC has studied SPACs to determine whether they require special regulations to ensure that these vehicles are not abused like blind pool trusts and blank-check corporations have been over the years. Many believe that SPACs do have corporate governance mechanisms in place to protect shareholders. SPACs listed on the American Stock Exchange are required to be Sarbanes-Oxley compliant at the time of the offering including such mandatory requirements as a majority of the board of directors being independent and audit and compensation committees.


[edit] Advantages
SPACs are more transparent than private equity as they are registered offerings regulated by certain SEC rules, including filing their financial statements and full disclosure of any material events affecting the company. Since SPACs are publicly traded, they provide liquidity to an investor (i.e. investment comes in the form of common shares and warrants which can be traded). Further, the unit structure, the ability to decouple the units and trade separately the common shares and the warrants, allows investors to correspondingly increase or decrease their risk return profiles. The unique benefits are the special rights of shareholders to vote in approval or rejection of the deal and the ability for investors to regain most of their funds, typically greater than 98%, if the SPAC fails to generate an acquisition within a 24 month period or should they vote against the deal and convert their shares for cash. In addition, it is an opportunity for individuals not qualified to buy into hedge or private-equity funds to participate in the takeovers of private operating companies that those funds typically do. Additionally, the SPAC vehicle for the target company is the opportunity to effect a reverse merger that yields more capital.


[edit] Disadvantages
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks may include:

limited liquidity of their securities
low visibility on future acquisition(s) at the time of the SPAC public offering
dilution due to management and sponsor shares (20%)
public shareholder approval contingency may make SPAC unattractive to sellers
potential for uncertainty associated with the SEC merger/acquisition proxy process
There is also potential for delay and expense attributable to the public shareholders' special rights and the costs of functioning as a registered public company.


[edit] Historical and Recent Developments
David Nussbaum of boutique investment banking firm EarlyBirdCapital, Inc. is essentially credited as the founder of the SPAC movement in the 1990s. Nussbaum identified an opportunity in the capital markets because of an absence of a true market for IPOs in the mid-1990s, depriving growth-oriented and emerging market investors of a new supply of public companies. Nussbaum identified an exemption in SEC Rule 419 providing that any company with $5 million in assets, or that seeks to raise $5 million in a public offering, need not comply with any of the restrictions of Rule 419. But rather than being free of Rule 419 restrictions, Nussbaum created a structure which voluntarily adopted the restrictions to attract investors to the SPAC structure such as putting all the money raised in escrow, except a small percentage for operating expenses and commissions paid to the investment bankers. He also required investor confirmation with a full disclosure document approved by the SEC and a time limit on finding a merger partner. But most important, Nussbaum arranged for a trading market for the stock of a SPAC, as well as for the warrants sold to the investors in the IPO. Trading of securities sold under Rule 419 are not permitted. As an extra twist for marketing, Nussbaum declared that each SPAC would specify a industry or geographic focus. Wrapped around this structure was a well-qualified and experienced management team that would be compensated with stock, but their experience and eye for deals would be valuable to the investors. Investors quickly snapped up SPAC offerings because 90% or more of their investment was invested in government securities while the SPAC searched for a merger target. If they did not like the proposed deal, they would likely receive 92% to 95% of their original investment back. Or when a deal was announced, if the price of the stock moved up, they could sell their shares in the open market. Although the investment was in a "blank check" the money was protected and investors had a legitimate means to opt out when a deal was announced. Companies liked the SPAC as a way to go public. In general, a company that might have considered a smaller IPO saw the SPAC as guaranteed cash, less risky than an IPO. All in all, the companies that merged with the initial SPACs in the 1990s generally fared well and the technique worked. SPACs in the 1990s tended to move counter cyclical to the micro and small cap public markets and when the IPO market heated up in the late 1990s, Nussbaum retreated from the SPAC market and began to work on more traditional investment banking and asset management businesses.

In 2003, the lack of opportunities for mid-market public investors to "back" experienced managers combined with the trend of upsizing private equity funds pushed entrepreneurs to directly seek alternative means of securing equity capital and growth financing. At the same time, the rapid growth of hedge funds and assets under management and the lack of compelling returns available in traditional asset classes led institutional investors to popularize the SPAC structure given its relatively attractive risk reward profile. SEC governance of the SPAC structure and the increased involvement of the bulge bracket investment banking firms such as Citigroup, Merrill Lynch and Deutsche Bank has further served to legitimize this product and perhaps a greater sense that this technique will be useful over the long term. Law firms involved include Cleary Gottlieb, Skadden Arps, Davis Polk, Graubard Miller, Akin Gump and Proskauer Rose. Some recently filed SPAC offerings used Paul, Weiss as issuer's counsel.

SPACs are forming in many different industries and are also being used for companies that wish to go public but otherwise cannot. They are also used in areas where financing is scarce. Some SPACs go public with a target industry in mind while others do not have preset criteria. With SPACs, investors are betting on management’s ability to succeed. SPACs compete directly with the private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.


[edit] Independent Research Coverage
Research coverage of SPACs has been limited. This is due to conflicts that discourage underwriters from covering the companies they are most familiar with. In addition, traditional sell side coverage is hesitant to allocate time and effort to research a company when certainty of deal completion is not known. SPAC Analytics provides analysis of all SPACs.


[edit] Sell Side Research
Legend Merchant Group publishes a SPAC index titled "SPAC UNIVERSE." The document gives detailed information and statistics on every SPAC since 2003 as well as SPAC marketplace statistics. SPAC UNIVERSE is published in New York City and updated weekly. Maxim Group publishes a weekly piece called Carte Blanche. Morgan Joseph created the Morgan Joseph Acquisition Company Index (MJACI) which is quoted on Bloomberg. The MJACI is a total SPAC market index that measures the daily market performance of all publicly traded SPACs formed since August 2003.


[edit] Statistics
Since 2003 approximately $20.4 billion of SPAC capital has been raised and 150 SPACs have been funded in the United States. Of the 150 SPACs that have been raised in the United States, 45 SPACs accounting for $3.7 billion have completed an acquisition with annualized returns to investors of -1.7%. Approximately 24 SPACs accounting for $2.7 billion have announced transactions with annualized returns to investors of 7.6%. Approximately 74 SPACs accounting for $13.5 billion are currently seeking an acquisition with annualized returns to investors of 3.7% and 7 SPACs accounting for $447 million have liquidated with annualized returns to investors of about -2.5%.

On December 7, 2007, approximately $1.23 billion worth of SPACs went public, setting a new one-day record. The three SPACs that went public raising $1.23 billion were Liberty Acquisition Corp. (AMEX: LIA) which raised $900 million in an offering led by Citigroup and Lehman Brothers, Global Brands Acquisition Corp. (AMEX: GQN) which raised $250 million in an offering led by Citigroup and Tremisis Energy Acquisition Corp. II (AMEX: TGY) which raised $76 million in an offering led by Merrill Lynch and EarlyBirdCapital.

The home page of SPAC Analytics is updated regularly with SPAC Statistics.


[edit] Some Successful SPACs
Chardan China Acquisition (CAQC) merger with Origin Seed Technology (SEED)
Tremisis Energy Acquisition (TEGY) merger with Ram Energy Resources (RAME)
Arpeggio Acquisition (APGO) merger with Hill International (HINT)
China Unistone Acquisition (CUAQ) merger with Yucheng Technologies (YTEC)
International Shipping (ISHP) merger with Navios (NM)
Services Acquisition (SVI) merger with Jamba Juice (JMBA)
Stone Arcade (SCDE) merger with Kapstone Paper (KPPC)
Boulder Specialty Brands (BDSB) merger with GFA Brands, Inc. (SMBL)
Freedom Acquisition (FRH) merger with GLG Partners (GLG)
Chardan North China Acqusition (CNCA) merger with HollySys Company (HLSYF)
Star Maritime Acquisition (SEA) merger with Star Bulk Carriers Corp. (SBLK)
Endeavor Acquisition (EDA) merger with American Aparel (APP)
India Hospitality Corp. (IHC LN) merger with Sky Gourmet and Mars Restaurant Group (IHC LN)
Chardan South China Acquisition CSCA) merger with A-Power (APWR)



[edit] SPAC Players
1. Maxim Group, LLC

2. EarlyBirdCapital, Inc.

3. Legend Merchant Group

4. CRT Capital Group LLC

5. SPAC Analytics

6. Citigroup

7. Chardan Capital Markets

8. Morgan Joseph

9. Newbridge Securities Corporation
10. Wedbush Morgan Securities Inc

11. Broadband Capital Management

12. HCFP/Brenner Securities LLC

13. I-Bankers Securities Incorporated

14. Ladenburg Thalmann

15. Roth Capital Partners

16. Kashner Davidson Securities Corporation

17. Viewtrade Securities, Inc

18. Joseph Gunnar & Co., LLC

19. Bathgate Capital Partners, LLC

20. Tower Gate Capital

21. Rodman Renshaw

22. Sunrise Securities

23. Deutsche Bank Securities

24. Goldman Advisors

24. FMP Financial Market Partners GmbH
24. Ferris, Baker Watts

25. PHD Capital

[edit] See also
Capital formation

[edit] External links
Blank Check Company
Blank Check, Blind Faith
Rule 419 -- Offerings by Blank Check Companies
Former Apple execs, including Woz, launch "blank-check" company, Acquicor
Betting on Blank Check IPOs
Blank Check to Spy
ATS Acquisition a Boost For Blank-Check Buying
$50 million to spend
This IPO is a blank check
Tom Hicks Wants a $400 Million ‘Blank Check’
SPAC investors are asked to buy in -- on faith
Deutsche Bank hires three for blank check IPOs
Greenhill files for blind pool IPO
Lazard vice chairman heads up blank check IPO
Berggruen launches largest 'blank check' IPO
'Blank check' company appoints Quayle ahead of float
Perella Weinberg scoops hedge fund first with GLG role
Billionaire launches $400m spac
Liberty Acquisition Holdings Corp. Prices 90.0 Million Units in Initial Public Offering
Wall Street’s New Status Symbol: the Spac
Perelman to Raise $500 Million in IPO for Acquisition
Citigroup prices $1bn of blank check IPOs