IPO Watch: SPACS Make Good

Ann C. Logue | Mar 25, 2008 6:20am EDT | Comment

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Some weeks, it seems like there is only one sector in the entire U.S. financial services business that is in demand: initial public offerings of special purpose acquisition companies. These are the blank-check deals in which investors give a management team money in hopes that they will make a good acquisition with it. If within two years they don’t, they need to return the funds, which create fewer expenses incurred between the IPO and the disbanding of the company. Even without an operating business, the SPAC has to pay rent, hire auditors and retain people to investigate potential acquisition opportunities. There’s a real opportunity cost to making a SPAC investment.

On the other hand, a SPAC transaction lets a company go public without the hassle of a road show or scrutiny from IPO buyers, something that many executives find demeaning. For that matter, it lets a company go public, which is no easy matter these days. Good companies will continue to want access to public markets, and restructuring companies will have divisions that they want to sell off. SPACs may make it possible for a handful of companies to get public capital in the next year.

Many SPACs have come public in recent months, but only a few have had deals to announce yet. One of the most recent was the March 13, 2008 announcement of the acquisition of Halcyon Asset Management, a hedge fund manager, by Alternative Asset Management Acquisition Corp. (AMEX:AMV), a SPAC that came public in August 2007. Alternative Asset Management will pay $505 million in cash and notes (more or less its entire net worth) for a 44% stake in Halcyon.

On March 7, Negevtech, an Israeli company that makes test equipment used to inspect semiconductor wafers for defects, announced that it would go public through a merger with Israel Growth Partners Acquisition Corporation (OTC:IGPAB.OB), a SPAC with $55 million U.S. in cash. Israel Growth Partners’ shareholders will end up with 51.3% of Negevtech, Negevtech will go public with an initial market valuation of about $50 million, and the company will have access to cash-to-fund working capital. Israel Growth Partners, which currently trades at $2.35 per share, went public in July of 2006 at $10.50 per share.

Boise Inc. (NYSE:BZ), the paper and packaging business of Boise Cascade, went public in February through a merger with Aldabra 2 Acquisition Corp., which had $200 million in proceeds from its March 2007 IPO. That allowed Boise Cascade, owned by private-equity firm Madison Dearborn Partners and Office Max, to concentrate on the lumber and engineered woods business.

GLG Partners, Inc. (NYSE:GLG), a European hedge fund manager, went public in June of last year through a merger with a SPAC, Freedom Acquisition Holdings. GLG sold a 72% stake in the company to Freedom for $1 billion and 230 million shares, a deal valued in full at $3.4 billion. Given that GLG’s history includes fines for insider trading in France and the United Kingdom, it might have found hostility from investors had it taken the traditional IPO route in this messy market. Still, the company is profitable (earning $83.9 million on revenue of $1 billion in 2007), and the stock has performed well. Freedom Acquisition was founded by a former hedge fund manager, Nicolas Berggruen, and it went public in 2006.

Like almost all things financial, there’s nothing new about a SPAC, although the current model has a twist: experienced management raising money through brand-name investment banks. The prior iteration involved shell companies, often the remains of bankrupt penny stock companies with no assets but over-the-counter shares that often traded in Vancouver. These shells were acquired strictly for their ability to help a tech company get its IPO done. The investment banks involved were not exactly recognizable, and the overall effect was something less than successful. The new model SPACs may be able to overcome that legacy if most of them make good acquisitions.

Recent IPOs:

Heritage-Crystal Clean (Nasdaq:HCCI); www.crystal-clean.com, March 11; $114 million post-money valuation): Heritage Crystal-Clean offers cleaning and waste management programs to 36,000 small industrial and automotive companies in the eastern and central United States, to help them meet regulatory requirements. These services include oil recycling, parts reuse and waste-drum disposal. A typical customer might be a car dealer. In 2007, the company generated $5.4 million in net income on $89.7 million in revenue. The IPO had a complicating factor of the simultaneous private placement of stock from one of the founding funders. The purchasers were current officers and shareholders, so most of them ended up with more stock after the IPO and private placement closed. How common is that?