Tuesday, February 12, 2008
Special Purpose Acquisition Companies - Wall Street Gone Nuts
Just when you think that Wall Street has already dumped on unsuspecting investors every dirty trick in and out of the book, they manage to spring a new one. This one comes in the form of SPAC's, or Special Purpose Acquisition Companies, which are set up solely for the purpose of making a single acquisition using investor funds within a finite period of around 18 to 24 months. Should the company fail to make this acquisition before the timer runs out, the company is dissolved and investments returned to shareholders.
Let me run that by you again. A brand new company with absolutely no assets, market, prior investments, customers or any form of business whatsoever, makes an IPO on the grounds that it will use the incoming funds to buy an undervalued company and make a killing for investors based on just that one big deal.
Naturally, what happens is that Wall Street has learned to game the system. An insider with clout, contacts with New York's big hedge funds, and years of experience navigating the myriad regulatory hurdles sets up an SPAC, sells a truckload of shares to the hedge funds and starts hunting for an acquisition. At this stage, the ordinary investor on the street barely knows about the SPAC's existence. If it pans out, everyone makes a big hoopla about it, it comes out in the media and ordinary investors think this is some hot new investment company and start buying shares, which drives up the price even further. The hedge funds then cash out, sell off all their shares in the SPAC and leave ordinary investors holding the bag, since the SPAC, and it's promoter, has virtually no interest in any more deals or in the long term future of the company.
Ok. So that's the background. Now let's talk specifics. Why is this so important today? Because the same dirty players who messed up by betting the house on CDO's and created the subprime meltdown are also involved in the SPAC game. The New York Times' DealBook blogs about this. Last year, there were 66 initial public offerings for SPACs, raising a total of $12 billion, according to Dealogic. If you got in early to Services Acquisition Corporation, which bought Jamba Juice, you did well. If you stuck around, you’re not a fan of SPACs. It’s stock price is down 60.5 percent since the I.P.O., to $2.76 a share; its shares traded as high as $12.25. Of course, virtually every bank is trying to get in on the action: Citigroup, Credit Suisse, UBS, Deutsche Bank, Lehman Brothers and Merrill Lynch to name a few. But take note, one bank, so far, has refused to play the SPAC game: Goldman Sachs. Hmmm.
Why Goldman Sachs' refusal to wade into SPAC's is worrying, while all the other banks are jumping all over it, can be explained here.
Let me run that by you again. A brand new company with absolutely no assets, market, prior investments, customers or any form of business whatsoever, makes an IPO on the grounds that it will use the incoming funds to buy an undervalued company and make a killing for investors based on just that one big deal.
Naturally, what happens is that Wall Street has learned to game the system. An insider with clout, contacts with New York's big hedge funds, and years of experience navigating the myriad regulatory hurdles sets up an SPAC, sells a truckload of shares to the hedge funds and starts hunting for an acquisition. At this stage, the ordinary investor on the street barely knows about the SPAC's existence. If it pans out, everyone makes a big hoopla about it, it comes out in the media and ordinary investors think this is some hot new investment company and start buying shares, which drives up the price even further. The hedge funds then cash out, sell off all their shares in the SPAC and leave ordinary investors holding the bag, since the SPAC, and it's promoter, has virtually no interest in any more deals or in the long term future of the company.
Ok. So that's the background. Now let's talk specifics. Why is this so important today? Because the same dirty players who messed up by betting the house on CDO's and created the subprime meltdown are also involved in the SPAC game. The New York Times' DealBook blogs about this. Last year, there were 66 initial public offerings for SPACs, raising a total of $12 billion, according to Dealogic. If you got in early to Services Acquisition Corporation, which bought Jamba Juice, you did well. If you stuck around, you’re not a fan of SPACs. It’s stock price is down 60.5 percent since the I.P.O., to $2.76 a share; its shares traded as high as $12.25. Of course, virtually every bank is trying to get in on the action: Citigroup, Credit Suisse, UBS, Deutsche Bank, Lehman Brothers and Merrill Lynch to name a few. But take note, one bank, so far, has refused to play the SPAC game: Goldman Sachs. Hmmm.
Why Goldman Sachs' refusal to wade into SPAC's is worrying, while all the other banks are jumping all over it, can be explained here.
Subscribe to Posts [Atom]
