Special-purpose Acquisition Company - History

History

Since the 1990s, SPACs have existed in the technology, healthcare, logistics, media, retail and telecommunications industries after boutique investment bank EarlyBirdCapital, specifically founder David Nussbaum in accompany with David Miller, managing partner of Graubard Miller lawfirm, developed the template. 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.

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.

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.

From October 2007 through January 2008, several billions of dollars were raised in new SPAC issuances. In the first quarter of 2008, stock market performance of SPAC-related securities has been poor. Some investors believe this poor performance reflects the large number of SPACs in the market looking for deals together with the generally lackluster performance of SPACs that have approved and completed business transactions to date. Moreover, investor sentiment for SPACs is reflected in the diminishing interested reflected since 2007. For example, 66 SPACs came public in 2007 with total IPO investment proceeds of more than $12 billion, the number of IPOs dropped to 17 worth $3.8 billion in 2008 and only 1 worth $36 million in 2009.

These environmental factors have given rise to some new games and players in the SPAC arena—of which investors should be aware. "SPAC Bandits" typically buy the common stock of a SPAC that is trading at a discount to the value of assets in trust. They may also sell short the SPAC's warrants. If the management of the SPAC is unable to find a deal within the allotted time frame, or if the proposed deal is voted down by shareholders, the SPAC Bandit profits when the SPAC and trust funds are liquidated. (In either case, the value of the warrants goes to zero.)

If the proposed business transaction is semi-palatable to a significant number of investors but shareholder approval is not assured, an investor can accumulate a position in the common shares of a SPAC (and, if desired, the warrants) and attempt to "SPACmail" management. That is—the investor can offer the SPAC management his "Yes" vote for the deal in exchange for some additional consideration. Back in the 1980s, "Greenmail" became taboo in corporate America almost as quickly as it arose. SPAC management teams have a very strong financial incentive to see their proposed transactions approved. It remains to be seen how SPACmail will develop.

Recently, JP Morgan in their attempt to prevent SPACmail added a no inducement to vote provision in the $300 Million SPAC named ANGELO, GORDON ACQUISITION CORP. It states "We, our sponsors and Angelo, Gordon have agreed that we and they will not, and will not permit any of our respective affiliates that we or they control to, pay or cause to be paid any consideration to or for the benefit of any public stockholder for or as an inducement to any vote for approval of our initial business combination (including payments of money, transfers of securities or purchases of securities) unless such consideration inures on an equal basis to the benefit of all stockholders who do not convert their shares in connection with the stockholder vote to approve our initial business combination."