Blank Check IPOs / SPACs

[rpr]

Does anyone have experience with blank check IPOs (SPACs)?

I know essentially money is raised for a blank check IPO based on the strength of the management.

I have relationships to top tier management candidates (founders of VC firms, experienced in M&A) and was thinking what it would take to put together a SPAC.

Could I do it with $1.5 to $2 million and raise $40 million? Assuming I had to pay the management retainers/salaries and cover the fees for a firm like EarlyBirdCapital or a major investment bank?

I've seen one SPAC where the founders put in $25,000, raised $150 million and will buy a company worth $300-450 million owning 25% of it. Another group put $2.5 million in, raised $144 million and will buy a company for $540 million owning 20%.

Although I read a statistic (as of 2/06) that only 4 of 40 SPACs since 8/03 have resulted in a merger. No merger means the investors lose approximately 10% of their funds.

[NajdorfDefense]

An I-Bank will want at least $2.8m in fees. Add Legal, Acc'tg, etc on top of that.

[Esection]

to investors, the quality and desirability of a SPAC is largely the experience and skill of its managers. if you are inexperienced in this area / buying and running companies etc, then i wouldnt expect much.

[rpr]

[ QUOTE ]
An I-Bank will want at least $2.8m in fees. Add Legal, Acc'tg, etc on top of that.

[/ QUOTE ]
I'm saying fees upfront, not the gross spread. Plus SPACs usually pay 10%. I thought the upfront fees would be no more than $500,000.

If you are paying that much upfront, the firm clearly wouldn't have any confidence in its ability to raise you the money.

[rpr]

[ QUOTE ]
to investors, the quality and desirability of a SPAC is largely the experience and skill of its managers. if you are inexperienced in this area / buying and running companies etc, then i wouldnt expect much.

[/ QUOTE ]
I could be a founding stockholder and not be part of the management. The Chairman I have in mind co-founded a VC firm, is well experienced in M&As and has high profile members of his advisory boards who have completed successful SPACs.

Also, I just read another statistic that said of the 12 SPACs in 2004, 7 completed acquisitions, 4 are pending and only 1 was forced to liquidate.

[Groty]

If you look through the S-1, and all the exhibits, you'll see that the principals typically loan the "administrative start-up" costs to the SPAC (legal fees to form the corporation and draft the registration statement and other offering documents, etc). If the bankers are successful in peddling the SPAC to investors, then the loan gets repaid out of the IPO proceeds. If the IPO fails, tough luck. Of course the bankers fees are skimmed off the top of the gross proceeds raised before the net proceeds are deposited in a trust.

Investors began balking at SPACs in late 2005, so the bankers started agreeing to defer part of their fees to get the deal done. For example, instead of the bankers taking their full underwriting fee off the top, they might take 50% of their fee in cash from the IPO proceeds and defer the other 50% until the management team completed an acquisition. If the management team fails to get an acquisition approved by shareholders , then the banker forfeits the deferred fees and those funds are returned to the investors when the trust is liquidated. It has the effect of increasing the amount of cash held in escrow to around 94%-96%, and provides an incentive to the bankers to not present a bunch of clowns as the management team.

The SPACs in the most recent generation started hitting the market in late 2004. This iteration contained a provision that management/founders committed to buy a certain number of warrants in the secondary market up to a specified price. The costs to buy these warrants would come out of the pockets of the founder/principals and not from the IPO proceeds. The out of pocket costs to the principals, if all the warrants were bought in the secondary market at the highest price specified, was typically $2-$3 million on a deal that generated about $100 million in proceeds, but it varied by deal. It was this feature that initially attracted hedge funds to the product because it created some outstanding arbitrage opportunities. After we sold the warrants in the secondary market, our cost basis on the stock, which was secured by the cash held in escrow and earning interest, was equal to about 85% of the cash held in trust. Who doesn't like buying dollar bills for 85 cents?

I think the SEC objected to the provision that mangement commit to buy warrants in the secondary market for some reason. I haven't looked at a prospectus on any of the deals that have come to market in the past 15 months, but I'm fairly confident investors still demand the principals have some skin in the game, I'm just not sure what form it takes.

When I was investing/trading them in 2004 to early 2006, Early Bird, ThinkEquity, Sunrise and CRT were pretty active underwriters. I think Ladenburg and others are now involved. Each underwriter had slightly different twists to the structures they were pushing.

I'd urge you to download an S-1 for the most recent deals of a couple of different underwriters to see how the deals are now being structured to clear the market. After you have a fairly good understanding of how the deals are structured, call the underwriters and bounce your idea off them.

They love fees.