Six Degrees: SPACs in the Spotlight

The past few years have seen the resurgence of "blank check" IPOs in the form of special-purpose acquisition companies (SPACs), publicly traded buyout companies that raise money to pursue the acquisition of an unidentified business. Michael Moe, chairman and CEO of ThinkEquity Partners LLC, a research-centric, growth-focused bank, is among several financiers at the forefront of the trend.

Typically, in a SPAC, a management team raises cash from investors in an IPO and then seeks a privately held operating company to buy. Until that happens, between 85 and 90 percent of the funds are held in a trust account and invested in government securities; the remainder goes to legal and administrative costs. When an acquisition target is identified, investors have an opportunity to vote on it. "To do a deal you need 80 percent approval," says Moe. "If investors don't like it, they can vote it down and effectively get their cash back."

SPACs co-managed by ThinkEquity include Ithaka Acquisition Corp., which raised $53 million, and Courtside Acquisition Corp. ($83 million). Courtside listed on the American Stock Exchange in July of 2005. But perhaps the company's highest-profile SPAC deal to date is the March 2006 IPO of Acquicor Technology, a business set up by Apple Computer co-founder Steve Wozniak; Gilbert Amelio, former chairman and CEO of Apple; and Ellen Hancock, former chairman and CEO of Exodus Communications. ThinkEquity was co-lead manager for the offering, which raised more than $172 million. Now Jazz Technologies Inc., the company completed a $260 million merger with Jazz Semiconductor in February.

Private company CEOs like SPACs because they're already funded, and these deals enable them to bypass private equity firms. Investors see SPACs as a way to access acquisition opportunities that are typically restricted to private equity funds.

Critics of SPACs -- and there are many -- argue that these deals are just a way for management teams to accumulate stock for cents on the dollar and for underwriters to collect fat fees, with most of the risk falling on investors. "The main criticism is that SPAC investors, by definition, have no idea of what they're investing in," notes Greg Sichenzia, founding partner with law firm Sichenzia Ross Friedman Ference LLP in New York City. "The SPAC investor is investing in a management team that is going to identify the acquisition target. If the SPAC fails to make an acquisition, the investor's money is returned, but the investor has lost the use of that money during that time."

SPACs "are controversial," concedes Moe, "and I understand why they're controversial, and in some cases they deserve to be controversial. It boils down to the people involved -- the management team, the bank -- and the purpose of the SPAC. They can be a terrific investment opportunity if you get the right kind of people and structure."

There's no sign that SPACs will be fading from the IPO scene any time soon. In fact, the size of these deals seems to be increasing. Marathon Acquisition Corp.'s August 2006 offering generated $300 million, and in December Freedom Acquisition Holdings Inc. announced that its IPO grossed about $480 million.