Of the two articles I wrote about Special Purpose Acquisition Companies (SPACs) in 2008, one questioned the whole idea of investing in blank-check companies, while the other examined the successful career of Richard Heckmann, whose latest project, Heckmann Corporation (NYSE:HEK), is a SPAC designed to acquire water-related businesses in China. Heckmann Corporation paid $625 million in October 2008 for China Water and Drinks, the fifth largest bottled water distributor in China. The acquisition is arguably one of the best to be consummated since the blind-pool resurgence several years ago. Despite this success, SPACs haven't exactly lit the world on fire and that's due to a lack of available debt financing. When that changes, I can't be sure. What I do know is that buying anything "sight unseen", especially of an investment nature, is a poor proposition. (These public shell companies hold many advantages over private equities. Find out why in SPACs Raise Corporate Capital.)

The Professionals Love Them
Both hedge fund and mutual fund managers have been buying up shares of these blind-pool companies using them as a form of arbitrage. Because SPACs essentially are cash held in trust - earning interest until and if an acquisition is made - they're an excellent vehicle to protect client capital on the downside. Former risk-arbitrage hedge fund manager Neil Danics says of them, "You're basically buying the same short-term Treasury that yields zero, but you're buying it at 7% with greater upside if a good deal is announced." But that's a big "if."

There are 740 SPACs currently trading with virtually no deals happening. Unless something changes soon, most will liquidate, which isn't a bad thing for professional investors, who'll just allocate the capital elsewhere. Thomas Kirchner, manager of the Pennsylvania Avenue Event-Driven Fund, invested in SPACs in 2008 because of the discounts to liquidation value, which were sometimes as high as 15%, but now are down around the 5% range. As Tina Pappas of Morgan Joseph acknowledges, "At some point, arbitrage opportunity disappears when everyone finds out about it." That day is near.

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Dreadful Acquisitions

SPACs are currently in a downward spiral that's will be difficult to recover from. Very few acquisitions have taken place in the past five years and those that have have been unmitigated disasters. Most SPACs end up returning cash to the original investors, which defeats the purpose of their creation in the first place. Add to this a dormant IPO market - although April has seen a slight resurgence in activity - and you have all the ingredients for a complete disappearance of blank-check companies. If the best they can do is to provide investors, professional and otherwise, with a safe investment, they're not stocks, but bonds or Treasury bills - and should be sold as such.

Five SPACs

SPAC Acquired Company Return Since Deal
Chardan China Acquisition Origin Agritech (Nasdaq:SEED) (63%)
Marathon Acquisition Global Ship Lease (NYSE:GSL) (64%)
Heckmann (NYSE:HEK) China Water & Drinks (29%)
Endeavor Acquisition American Apparel (NYSE:APP) (70%)
Services Acquisition Jamba Juice (Nasdaq:JMBA) (94%)

At market close on April 23

Bottom Line
The five acquired companies listed in the table above include a hybrid seed company in China, an owner of container ships, a Chinese bottled water company, a racy t-shirt manufacturer and a fruit smoothie restaurant chain. None of these, on the surface, would seem to be a bad business to own. However, with the exception of American Apparel, the SPACs aren't currently making money. The only people benefiting from the consummation of these transactions are the founding shareholders, despite the abysmal returns. In the case of Richard Heckmann, he still holds 17.78 million shares, currently worth $92 million. He paid slightly more than $2 million for 13.2 million shares in its IPO. The rest, I'm guessing, he bought using warrants priced at $6. Therefore, in a worst-case scenario, Heckmann paid $29 million or $1.64 per share. I bet he thinks SPACs are special. But I disagree. (Learn more in Private Equity Opens Up For The Little Investor.)