The Magic of Blank-Check Firms
Manoj Misra
The Magic of Blank-Check Firms
Amex, Small Banks
Reap the Benefits
Of the Hot IPOs
By LYNN COWAN
February 19, 2008; Page C3
The trend toward bigger, higher-profile initial public offerings of shares
in blank-check companies in the past year has created a trickle-down effect
for two largely unnoticed beneficiaries: The American Stock Exchange and
small boutique investment banks.
Big offerings like the $920 million raised by activist investor Nelson Peltz
for Trian I Acquisition Corp. last month have grabbed much of the attention
swirling around the recent boom in blank-check companies, so called because
they begin life as empty shells and use their IPO proceeds to acquire
operating businesses. At the same time, larger investment banks such as
Citigroup Inc. and Deutsche Bank AG have been jumping in to underwrite such
deals.
But the Amex, where the majority of these IPOs list, and smaller boutique
banks like Morgan Joseph & Co., EarlyBirdCapital Inc. and Legend Merchant
Group Inc., which have been involved in blank-check offerings for years
before they became popular, aren't missing out on the action, either.
In 2007, nearly a quarter of all IPOs in the U.S. were blank-check
companies, which are also known as special-purpose acquisition companies, or
SPACs. During that time, Amex listed 50 SPACs that raised a combined amount
of more than $10 billion through IPOs, capturing the bulk of the listing
market.
Although the privately owned Amex doesn't divulge revenue data, executives
there say their equity listings rose 60% and the number of IPOs listed more
than doubled from 2006 to 2007, with a large part of that increase
attributed to SPACs.
Meanwhile, NYSE Euronext, which announced its plans to buy the American
Stock Exchange last month, is in the preliminary stages of setting up
standards with the Securities and Exchange Commission to list SPACs on the
New York Stock Exchange.
"It's become a very important and significant part of our overall listing
business," says Robert Wotczak, managing director and head of equities at
Amex. "Our pipeline is very robust. We're well on target in 2008 to meet or
exceed 2007's levels."
Now that major investment banks like Citigroup are raising as much as $1
billion for some blank-check companies, smaller SPAC banks like
EarlyBirdCapital are seeing the market balloon for a structure they had
struggled to legitimize just five years earlier, when most deals never
topped $100 million. Yet the smaller underwriters are enjoying the spoils of
a larger market even as their share of it declines.
"I think it's a positive thing for the smaller boutiques. The larger banks
have garnered more of the market share, but they have increased the market
size so dramatically that the amount being retained by the smaller firms is
much larger than it was in 2003 and 2004," says David Allan Miller, a
managing partner at law firm Graubard Miller, who helped to create the
original SPAC structure 15 years ago with EarlyBirdCapital Chairman David
Nussbaum.
Not every aspect of the legitimization of SPACs has benefited boutique
banks, however. As higher-caliber management teams led by people like Mr.
Peltz and Dallas billionaire and Texas Rangers owner Thomas Hicks have
become involved in SPACs and more investment banks have competed for their
business, new underwriting concessions are being demanded.
Five years ago, an investment bank earned a straight 7% fee from a SPAC as
soon as the IPO listed; now, usually half is paid at the listing, with the
other half due only after an acquisition is approved, as much as two years
later.
Smaller firms say while they can't compete with the larger underwriters on
distributing IPO shares, they are effective at selling their experience
completing acquisitions.
"SPACs are no longer just the purview of securities salesmen," says Legend's
president, Tom Gallagher. "You have to assist in evaluating the management
team, selecting the acquisition target, helping to structure it, and
persuading investors that it's a good deal."
Write to Lynn Cowan at lynn....@dowjones.com
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