No slack with SPACs

Management has 3 years to find a suitable candidate -- otherwise the capital must be returned. Investors buy into the IPO where their money is put into trust until a suitable candidate can be found. The amount in trust started at 85% back in 2003 when they were first hatched but the trust amount has significantly risen and is currently hovering around 95%+. In some cases that amount is actually over the IPO amount due mainly to investors demanding the bankers only take a portion of their fee upfront and the rest upon a successful deal being acquired, plus the management teams are now having to invest a larger amount upfront -- which also adds to the SPAC's coffers. So in essence, the SPAC structure allows institutional and individual investors alike to get a free look at the proposed candidates to be acquired. If the investors do not like the deal they can vote themselves to be redeemed and their only loss is a small spread of the trust value and the time value of the capital.

Why the popularity of SPACs?

SPAC's popularity has risen dramatically over the last three years in terms of dollar size and shear volume of new SPACs being formed. In fact the average size of a SPAC raise in 2007 was over $180 million with a number of deals approaching almost $1 billion. Much of the SPAC's popularity is in the fact that these structures for the most part are boilerplate so the bankers can stamp these out quickly. The bankers are very happy to do this because they are raising capital for the dream, there is no operating company to actually value, price and quantify. The SPAC structure protects the investor and the banks can get their fee paid upfront and then on to the next. This particularly bodes well in a market where IPOs have all but vanished. SPACs really are a superb structure that allows people access to the clubby world of private equity investing with an out.

Some tips for investors?

Investing in SPACs still takes some due diligence, especially when it comes to management experience and prior track record. Also, it is important to look in the SEC filings to see how many extensions they can receive and what specific percentage of the vote is needed to push an acquisition through. Look at the track record of the underwriter, how many SPACs have they done, what have been their success ratios in getting a deal acquired. If you are putting your hard earned money up for a management dream team, make sure they can bring qualified deals to the table -- because that is were the investor will really make money.

You recently attended a SPAC conference. What was your take?

I was just in San Francisco attending a SPAC conference that had two tracks, the lawyers and the underwriters. Each gave a very interesting perspective on the nuances of the SPAC market. The conference was extremely educational and really gave some insight on the types of deals getting done, what valuation metrics are being applied and the changes that are on the horizon. One thing that absolutely struck me was the size of SPACs will definitely be smaller in 2008 mainly because it allows investors to get more bang for the buck and really opens up the universe of potential transactions for the management teams. It was clear to me that SPACs are moving full steam ahead especially in light of the anemic IPO market that currently exists. Bankers have got to eat and this structure allows them to just that.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.