Euromoney - June 2006, Pgs. 82-87by: Helen Avery
No assets, no product, no business plan. The special purpose acquisition company (SPAC) exists for the sole purpose of receiving investors' money so it can go acquire some sort of a company. The chosen target is not part of a well-defined strategy with a particular purpose in a broader business plan. In fact, the publicly traded SPAC has no business plan and no assets, apart from what it can convince investors to give it. American and British investment bankers, hedge funds, and other professional investors have quietly socked $3 billion into SPACs since they initially listed on the American Stock Exchange and the OTC Bulletin Board in August 2003, the first of 50 SPACs listed in the United States. In the United Kingdom, SPACs are beginning to show up on the Alternative Investment Market (AIM). Helen Avery thought that canny professional investors would give SPACs a wide berth, but she now knows otherwise. Investors have turned millions over to these cash shells in the hopes that the SPAC might find a lucrative acquisition.
Dazzling potential profits. Certainly one lure is the SPAC's potential for dazzling profits, the author notes. Origen Agritech, a 2004 SPAC underwritten by SPAC pioneer EarlyBirdCapital, has generated a total return of 595%. EarlyBirdCapital has put together other deals with over 100% in total return. This upside potential has led many hedge funds and some mutual funds to pump millions into SPACs, although almost no one is willing to discuss the matter publicly. Not all SPACs make money, of course, and most have total returns in the single or low double digits. More worrisome is the tendency for returns to decrease over time. Flipping early will generate the highest return, but the total number of shareholders per SPAC indicates that retail investors have crept into the investor mix. "Buyer beware" may be reasonable for institutional investors, but regulators demand greater safety for retail investors.
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Abstracted from Euromoney, published by Euromoney Institutional Investor Publs., Nestor House, Playhouse Yard, London EC4V 5EX, England. http://www.euromoney.com.
