Blank-check companies, also called special purpose acquisition companies (SPACs), give capable executives the opportunity to raise funds in a similar fashion to an IPO. Only in this case, there is no operating company. The money raised from investors is put into a trust until management can find a target to buy and shareholders (at least 80% of them) approve the acquisition. Essentially, shareholders hand management a blank check to do with as they see fit.

SPACs commonly issue units with one common share and one warrant bundled together. Management then has a certain timeframe (usually 18 to 24 months) to find a suitable business prospect, and if none is available, give back about 98% of the funds. Traditional IPOs in the last year have virtually disappeared from the investment banking landscape. So far in 2008, 19 companies went public through an IPO; of those, 11 were SPACs. In the same two months in 2007, 38 companies went public, according to Robert Elder of the American Statesman. If not for the SPAC, investment bankers would have very little to do these days. (To learn how IPOs work, read our IPO Basics Tutorial.)

Are They Any Good?
While SPACs allow individual investors to participate in a quasi-private equity, the two are quite different in one major way; private equity firms generally invest in many businesses; SPACs invest at least 80% of the funds raised in one company. There is no diversification to protect management and investors from a poor decision. In 2007, 65 blank-check companies went public raising $11.7 billion in proceeds. Few have yet to make an acquisition.

Two deals that did close in 2006 clearly demonstrate the risks involved in this type of investment. Endeavor Acquisition (AMEX:EDA) and Services Acquisition Corp. International.

Endeavor Acquisition
In December of 2006 Endeavor Acquisition's IPO raised $120 million at $8 per unit, which consisted of one common share and a warrant to purchase an additional common share for $6 sometime in the future. One year later on December 12, 2007, it acquired American Apparel (NYSE:APP), the racy t-shirt manufacturer with offices around the world. Controversial CEO Dov Charney would continue in this role and receive 37.3 million Endeavor shares, valuing the deal at $382 million. The price of the stock at the time of announcement was $7.55.

Almost 26 months later, the original $8 per share is now worth about $9, an annual return of 6%. That's better than the S&P 500 but worse than Gildan Activewear (NYSE:GIL), one of the largest t-shirt manufacturers in the world. Considering American Apparel stock was $15 at the beginning of the year, it's still an acceptable rate of return. Its fourth quarter numbers were excellent, especially the same-store sales, up 40% year-over-year; and yet the stock flounders. Reasons for this include Jim Cramer, and others not approving of the way Charney handles himself and a lawsuit by Woody Allen. Both definitely are a drag on the stock price. Long term, American Apparel should be fine, with or without Charney.

Services Acquisition
The company went public in June 2005, raising $120 million at $8 per share. Steven Berrard, its CEO, was a long-time employee of the Florida billionaire Wayne Huizenga, running various divisions, including Blockbuster (NYSE:BBI) and Autonation (NYSE:AN). He left in 1999 to operate his own venture capital business. As the name implies, Berrard was looking for a service business that he and his management team could jump in and grow quickly. On March 10, 2006, it entered into an agreement to buy Jamba Juice Company for $249 million. Jamba (Nasdaq:JMBA) is a fruit smoothie retailer with 707 stores, located primarily in the United States.

Investors loved the deal and the stock moved up to a high of $12.44 on May 6, 2006. Then it came crashing back to earth and today trades under $3. Investors who bought the original IPO are $5 underwater with very little hope for improvement any time soon. Recently, an analyst with Jefferies & Co. initiated coverage of the stock, giving it a 'hold' recommendation for two key reasons:

1. The California stores are doing horribly; same-store revenues decreased by 1.7% in 2007; and,
2. The company's selling, general and administrative expenses are too high.

Add to this, company guidance suggesting 2008 comparable store sales will be between -2% and 2%, and you don't get the feeling a turnaround is iminent.

Bottom Line
Former SEC Chairman Arthur Levitt is dead set against SPACs. He feels they provide little transparency to the investor. As Jamba demonstrates, even the best management doesn't guarantee smooth sailing. Given this and the fact you could wait two years for an acquisition to occur, there must be better places to invest your money.

For related reading, check out The Murky Waters Of The IPO Market.

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