The Latest – but Not Greatest – Thing: SPACs

What would you think of forming a company to buy those private firms that that have already been looked over and rejected by the best VCs, LBO firms, private capital groups, investment banks or anyone else with 150 million or so to spend? 

Probably not a whole lot.

Yet that’s essentially the entire idea behind one of the hottest new brokerage products out there: SPACs.

has a brutal take takedown on them:

WOULD you hand over wads of cash to a money manager you didn’t know, to invest in a company he hadn’t yet discovered, and would you then also pay a boutique investment bank you had never heard of as much as 10 percent to get in on that deal?

If the answer is yes, then join the latest alternative investment craze: special purpose acquisition companies, or SPAC’s.

They are essentially blank-check companies that allow their managers to raise money from the public to later invest in another company – although issuers do not disclose the target because to do so would mandate onerous disclosure requirements. Think of a SPAC (rhymes with smack) as a publicly traded buyout company.

My own theory on why these are suddenly so popular on the Street is straight-forward: They are easy to sell, they hit all the right buzz words, and they have very high fee structures.

Here’s more from the NYT:

Here’s how it works: A couple of investors want to buy companies in China, but they need $30 million to pay for the companies. They hire a firm like EarlyBird Capital, an investment bank in Melville, N.Y., which has been busy raising money from the public for the management teams of SPAC’s.

These companies are typically priced at $6 a unit, which generally includes one share of common stock and two warrants with an exercise price around $5. If all goes well, the offering generates about $30 million to the managers who are then entrusted, for 12 to 18 months, to find a company to buy.

The underwriting bank collects an enormous fee – as much as 10 percent for the offering, more than the standard 7 percent for an initial public offering. The SPAC then puts 80 percent to 90 percent of the money in a trust, sets aside a minimal amount of funds – usually less than $1 million – and tries to find a company.

If they find one, and all the shareholders approve the deal, the management gets 20 percent of any profits eventually generated. The shareholders get ownership of a company that they may or may not want to own. If they don’t, they can sell their shares.

If in 18 months the managers have not yet found a company, they give back the money, minus the fees and expenses.

So let me se if I understand this idea: I give you my money to invest in sometihng which has a very low probability of success. The most likely apparent outcome occurs, and I get my money back minus 10%? Gee, where do I sign?   

Go read the entire column . . .

Crave Huge Risk? This Investment May Be for You
Jenny Anderson
NYT, September 23, 2005

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What's been said:

Discussions found on the web:
  1. Big Al commented on Sep 25

    Wasn’t there a company formed during the SS bubble which was essentially this.

  2. wcw commented on Sep 25

    “..a company for carrying on an undertaking of great advantage, but nobody to know what it is.”

    The modern version is slightly more honest. The fees are rapacious, yes, but they are right up-front about them.

    “Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of ¬£2,000. He was philosophical enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.”

  3. Danny @ CMG commented on Sep 25

    I sold SPACs when I was a broker….

    If you are an investor, I DO NOT recommend them.

    If you decide to invest in one, please do your homework — the most important thing to consider is the management team leading the project.

  4. royce commented on Sep 25

    Didn’t investors take anything away from the experience of the late 1990s?

  5. Catablast! Media Group commented on Sep 25

    Royce asks:

    Didn’t investors take anything away from the experience of the late 1990s?

    You wish.

    If they did, they would’ve stayed away from (BIDU).

    Investors haven’t learned jack.

    Goldman’s Anthony Noto was being generous when he put a $27 price target on that piece of junk

  6. MAT commented on Dec 9

    SPAC’s are great investment, your downside is protected by the trust account, and if you dont like the deal vote no and get your money from the trust account. VERY SIMPLE for example one that just announced an acq. symbol (SEEDU) up 400%. Now tell me you wont be happy with that return in 18 months. Go Home……There better than risky stocks, with bigger upside potential!!!!

  7. spac lover commented on May 4

    I love SPACs!

    Here’s a couple more symbols for you…

    [SVI] went from $ 6 upto $ 17.45*


    [CNCAU] went public at $7 and after announcing went up to … $ 27.25*

    * value includes the warrent(s) that were included in the IPO “unit”.

    but it still is an investment and all investments have risks, when you are investing in a SPAC you need to consider the MANAGEMENT TEAM and the INDUSTRY that they are getting involved with… but like the previous individual just mentioned, with a limited down-side and this kind of an upside within 18 months… would you rather have you money in an orange savings account collecting 4%?

    I’m gonna try to DOUBLE or TRIPLE my money within 18 months… and if it doesn’t work out, then i get my money back, or trade up above my cost.

    There are currently 27 SPACS that are publicly trading…of those, NONE are below the IPO price. 1 company is already up 40% with no deal yet, but the average is around 15%.

    Like I said before I LOVE SPACs!

  8. want a spac commented on Jul 14

    Where do I get a list of all SPACs trading?

  9. Randy Kase commented on Oct 7

    We are an advanced start-up company with proven services and products very much in demand by all consumers and a large sector of vendors including contractors, suppliers, brokers, professionals and various tradesman and retailers.

    Our core business is to match consumers with contractors/vendors, suppliers, etc. for a fee or % of the job and, then, to sell marketing services and products to our new “clients”.

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