Are Blank Checks Bouncing Back?

These companies, created solely to make acquisitions, were all the rage in the '80s. Now, they're a growing sector of the IPO market

Back in the '80s, an obscure form of IPO known as the "blank check" drew scrutiny from securities regulators. In these deals, publicly held companies are created for the sole purpose of making acquisitions. They issue shares to the public in an IPO, and management is free to use the money as it wishes to buy up other companies.

The top brass of the outfit can have wide latitude. Although specific deals are generally subject to shareholder approval, the company doesn't need to announce its plans or strategy in advance. Investing in the company is essentially a vote of confidence in the judgment of the managers, who have a "blank check" to spend as they pleased.

Like other artifacts of the '80s, the blank check is back. While still a small percentage of the total IPO market, these deals are unquestionably on the rise. On Mar. 22, smoothie chain Jamba Juice announced that shareholders had approved a merger with Services Acquisition Corp. (see AP news story, 3/21/06, "Jamba Juice Holders Approve Acquisition"). Services Acquisition (SVI) describes itself as a blank-check company that was formed for the specific purpose of consummating business combinations.


  SVI said in a statement it raised net proceeds of approximately $127 million through its initial public offering last summer. It has been looking at acquisitions since then. Its management includes former executives from Blockbuster (BBI), AutoNation (AN), and Boca Resorts. Jamba Juice declined comment, citing a quiet period pending the filing of a proxy statement with regulators.

It was just the latest sign of the growing acceptance of the blank-check buyout. Earlier this year, Apple (AAPL) co-founder Steve Wozniak said he and several other Mac veterans had created Acquicor Technology to make acquisitions (see BW, 2/6/06, "Steve Jobs' Magic Kingdom"). Michael Moe, CEO and founder of underwriter ThinkEquity, declined comment on Acquiror, citing a quiet period.

The growth of the blank-check sector is surpassing the overall IPO market. There were 28 such deals last year in the U.S., up from 10 in 2004, according to Dealogic. The number of conventional IPOs declined during that same period, from 255 in 2004 to 239 in 2005. And it looks like 2006 will be an even stronger year for the blank-check. There have been eight such deals so far this year, up from just three at the same time in 2005. Overall, there have been 45 IPOs this year, a bit under the 47 at the same time last year.


  The blank-check phenomenon is still a relatively small part of the IPO market, though. These deals were worth $2 billion last year, while the overall U.S. IPO market was worth $40 billion, Dealogic says. And the largest blank-check IPO of the year, Acquicor, is worth only $150 million. That wouldn't even make the list of top-10 IPOs, which is headed by the $1 billion issue of Grupo Aeroportuario (PAC).

Right now, the blank-check market appears limited to the U.S. Financial regulation in the U.S. has increased in recent years, but the regulatory climate and the business culture are still more open than in other regions. "There doesn't appear to be much, if any, blank check IPO activity in Europe," says Kees Koetsier, corporate partner with Benelux law firm NautaDutilh office in New York.

But there's a reason why blank check deals are useful in some cases. As it becomes harder to do an IPO in the face of tougher regulations and more skeptical investors, managers of companies may resort to an M&A deal with a company that already has gone public, thereby beating an alternative path to the exit door.


  "There are times when it's difficult for companies in certain industries (like biotech, for example) to access the IPO market, or there can be circumstances that are difficult for the IPO market to accommodate -- such as when a management team wants to take a lot of money off the table in the transaction, rather than having the proceeds invested in the business -- that can be addressed by a special purpose acquisition company", says Ray Minella, director of investment banking capital markets at Jefferies & Co., a New York based investment bank.

The deals also make it possible for managers to bail without making their company look bad. Investors don't appreciate it when the founder or CEO of a newly minted IPO heads for the exits. A blank-check IPO can help management cash out without the need to sell shares in the public market, investment bankers say.

That sort of thing might not sit too well with regulators, which is why some observers think the scrutiny that occurred during the middle '80s could return. But for now, the blank-check business is still gaining strength.

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