Editorial Board

Endorsing a Blank-Check Company Requires a Leap of Faith: View

It’s easy to see why corporate bosses who get squeezed out of power are tempted to set up so-called blank-check companies as part of a comeback strategy. What’s baffling is why stock-market investors should back these propositions.

Blank-check companies raise money in initial public offerings before they have any operating assets. The funds are meant to be spent on an acquisition that hasn’t yet been specified. Investors are essentially betting on the deal-making savvy of management. Notable creators of such vehicles include Gil Amelio, former chief executive officer of Apple Computer Inc., and Tony Hayward, one-time CEO of BP Plc, whose new blank check entity, Vallares Plc, is the subject of an article in the current issue of Bloomberg Markets magazine. Earlier this summer, Vallares raised $2.15 billion through an IPO on the London Stock Exchange.

For blank-check companies to succeed, all hopes must come to fruition. Management must find a suitable acquisition candidate and negotiate a bargain price. Operators must run the enterprise well. The stock market must support a rising valuation for the acquired company. All of these bits of good fortune rarely coincide.

More often, something goes wrong. Some blank-check bosses can’t find a willing target and must return the money to investors. Those who can strike a deal face other hazards, such as management turbulence. Or they may overpay for their acquisitions, leaving IPO investors with big losses.

Record of Underperformance

Since 2003, a total of 98 U.S. companies set up to make such special-purpose acquisitions have completed a takeover, according to SPAC Investments Ltd., which provides analysis and recommendations for investors. The average annualized return of such so-called SPACs in the stock market since 2003: negative 18.4 percent. By contrast, the Standard & Poor’s 500 Index returned an average of 6.7 percent annually in that period.

The history of blank-check companies is riddled with scandals, and U.S. regulators have repeatedly tightened rules on how these businesses can operate. Acquisitions now can’t proceed without shareholder approval. Managers are precluded from paying themselves excessive fees before they have done any work, or frittering away IPO proceeds in ways that shareholders wouldn’t welcome. Such safeguards protect U.S. investors to some extent and should be extended to other countries’ markets.

The most decisive way to regulate the blank-check business would be to make such offerings off-limits to anyone except the sorts of wealthy investors who already participate in hedge funds and private equity. Such rules would be an especially valuable safeguard for blank-check deals that let risky foreign companies trade on U.S. or European exchanges without passing usual listing requirements.

Global capital markets already provide plenty of other ways for the best corporate acquirers to ply their craft. At a time when more transparency and disclosure are crucial to rebuilding public confidence in the markets, the inherently opaque nature of blank-check companies strikes a discordant note.