Goldman Cancels its SPAC

Sad news yesterday for the SPAC world. According to yesterday's Wall Street Journal, because the IPO of Goldman Sachs' planned SPAC, Liberty Lane Acquisition Corp., failed to price, the SPAC announced that it had canceled its proposed IPO due to market conditions.

Originally Goldman had hoped to start trading Liberty Lane's stock last week, then they postponed to this week, and now this cancellation. Observers seem to differ as to whether Goldman's planned changes to the SPAC structure were partially to blame for their failure to attract investors, or whether the failure heralds a declining interest in SPACs generally.

Goldman had planned to reduce the interest in the SPAC granted to its management team, and require less money up front from them. They also reduced their underwriting fee from what is traditional. To blame failure to price on this, however, seems strange as these changes were meant to benefit initial investors as well as the acquisition targets.

There are still a number of quality players out there churning out new SPACs with high quality management teams and lots of ambition. There are still a number of good acquisitions being made. There has been a slowdown that is hopefully due more to the saturation of the market than anything else. Some players are beginning to examine the potential of radical changes in the structure.

In any event, let's hope there is a strong future for this useful vehicle.

Thank You Thank You Thank You

I was just informed by Bloomberg Press, the publisher of my book, that Reverse Mergers: Taking a Company Public Without an IPO, is about to enter its third printing. I cannot overstate my appreciation for the support I have received from readers, blogees, clients and friends. Of course I also thank everyone at Bloomberg, as their efforts at spreading the word have been phenomenal. They have been running radio ads for months on Bloomberg Radio and supporting me in my various appearances.

I am very pleased that the publishing of this first-ever comprehensive resource for our RM world helped legitimize what we do and, as one commentator of the book said, "lifted the veil" on this previously little known set of techniques. I am truly humbled by all the nice words and support I have received. Thanks so much to you all.

Where is the next China?

To paraphrase Garrett Morris on the original Saturday Night Live, the People's Republic of China has been very, very good to the reverse merger and SPAC world. In 2007 about one quarter of all reverse mergers involved companies from China going public through a merger with a US shell. According to the Reverse Merger Report, that trend continued through the first quarter of this year. Many SPACs have been focused on deals in China.

The "yuan rush," as I called it in my book (a Google search leads me to believe I may have actually coined this phrase), has led to successful deals for many. Yes a few klunkers along the way, and even a scam artist or two has made it through. But the vast majority of the Chinese deals have been strong, interesting growth companies.

The challenge with any rush is that everybody and their brother wants to join in. The number of players working to develop deals in China has exploded. The competition for deals has become greater. The Chinese government has placed speed bumps in the way of getting deals done because of their concern about too many Chinese companies being controlled by foreigners.

Investors are still snapping up these deals, and the market for Chinese reverse mergers remains strong, with very favorable valuations for these companies as they complete their process of going public in the US. But it is getting a little harder because of the reasons described above.

Thus, a number of key RM players who had set up major operations in China have now begun to hedge their bets a bit and look elsewhere. Some might have thought the other "BRIC" countries of Brazil, Russia and India ("C" of course being China) might be winners. Well, Russia and India are still not seeing much action.

(By the way, according to Wikipedia, "the term BRIC was first prominently used in a thesis of Goldman Sachs. The main point of this 2003 paper was to argue that the economies of the BRICs are rapidly developing and by 2050 will eclipse most of the current richest countries of the world. The Goldman Sachs thesis is not that these countries are a political alliance, like the European Union, or a formal trading association, but they have the potential to form a powerful economic bloc.")

However, it appears the next place to head for RM deals is Latin and South America (yes including BRIC country Brazil). I believe a combination of factors is leading players there. First, these countries are simply closer to home, and those who go to Asia every other month can attest to the wear and tear it takes on them having to leave our hemisphere, not to mention that fabulous 12-hour time difference.

Second, language barriers are fewer as many, if not most, folks speak English. Third, there is generally less political uncertainty in most of these countries than in China. Fourth, in most of these countries, as in China, there is not a well-organized local stock exchange that helps companies go public without leaving the country. Fifth, at least for the moment there are very few players seeking to finance and take public businesses in the region. Sixth, as the Goldman Sachs report attests, there are a number of countries in Latin and South America where economic growth is significant.

What of the concerns often expressed that corruption and fraud are rampant in these areas? As with China, the players will work with experienced partners on the ground in each country to do their best to steer clear of the criminals. What of the juntas, the dictators, the anti-US sentiment in some countries? Again, not every country in the region will be ripe for opportunity, but a number of them will. It has been widely reported that major RM player Tim Keating has chosen Colombia to establish his regional operation.

Personally, I have no particular objection to a major due diligence exercise in Rio de Janiero. Go southern hemisphere!

Our thoughts are with the families of our fallen soldiers on this Memorial Day weekend in the US.

Signs of the Times

I went to a dinner this past week for a well-known charity, an advocacy group. It was their annual "Wall Street dinner," run by hedge fund managers and private equity types. Top notch speaker, good food, good company. I had attended the dinner last year. The one difference: last year the room, at famous Cipriani's in midtown Manhattan, was absolutely packed to the rafters - they put tables in places that probably broke the fire codes. This year, tables comfortably spread out and no exits blocked. A visibly smaller crowd.

Another sign - a client who told me a year ago his meetings with potential investors in PIPE deals would end with requests for wire instructions to send money. These days, he says, the meeting ends with investors saying, "Thanks for inviting me, I'll get back to you."

Wall Street is hurting. Major layoffs are taking place at pretty much every brokerage house. The New York Times reported that these layoffs are more "stealth," being done a bit at a time rather than en masse. The M&A world was rocked by the subprime mess leading to tight credit for deals. That is only now beginning to thaw just a bit. The Dow is all over the place. The country is in a recession and real estate values are plunging in many areas.

However, in parts of the finance world, there is continued activity. In the RM world, we see no reduction in deal flow in my law firm. Quite the opposite in fact. There remain many growth companies around that can benefit from being publicly held. They are less concerned about today's market conditions and know that, as always, this down cycle will lead to an up cycle.

PIPEs took a brief pause in the first quarter, but public companies still need money, and they can only wait so long when their stock price dips before they need to raise the money no matter what, so sure enough we are now busier than ever representing investors and broker-dealers in PIPEs. SPACs have slowed slightly, but that appears to be more a function of the need to absorb the deals that are in the marketplace than any negative long term trend.

So it is difficult to watch friends at places like Bear Stearns get hurt. But anyone who has been through a down market knows (a) that it is inevitable and (b) this too shall pass. Next upturn, make sure to put something away for a rainy day. In the meantime, let's be pleased to be in an area of finance that, while it doesn't shoot for the moon when things are great, it also isn't as badly affected when things turn down.

The Case for Form 10 Shells- Valuable But Not for Every Deal

In the latest issue of the Reverse Merger Report, just out this week, I provided a guest column with the above title. At some point down the road I hope to post it here, but for now it is in the safe hands of the RMR and its subscribers. If you haven't subscribed yet, you can (and should) do so at www.dealflowmedia.com.

Within our RM community there are leading figures who have their "thing." Some are strong proponents of self-filings. Others believe it is simply easier to complete a merger with a legacy OTCBB shell with an operating history. Still others have seen the value of using clean virgin shells in shell mergers. And yet still others believe that the flexibility provided by shells trading on the OTC Pink Sheets are the way to go. There are even those who have suggested that questionable so-called "footnote 32 shells" can be a viable alternative. And last are those who love to work with SPACs.

In many cases, those who oppose others argue that choosing one technique as one's primary suggested approach is based upon their source of income for their own business, whether it be law, investment banking, shell principal or the like. In my case, I prefer not to be known as someone who only does one thing. In fact, while I admit to being a very strong believer in the many benefits of the virgin shells in transactions involving a simultaneous financing, in the guest commentary you will see I talked about circumstances where a self-filing or merger with a legacy shell is indeed preferable. And in fact we work on all these types of transactions with our clients.

In talking about virgin shells a few years ago, a client said, "Just make sure you don't suggest that this is the anti-SPAC." And I believe I have not. Whether in my book or this blog, I believe I have taken a fair and balanced view of all these alternatives, recognizing each of their advantages and disadvantages (including virgin shells - note the subheading above), and acknowledging that every company considering its strategic alternatives is different.

I hope we can all do the right thing - namely, to be sure to provide those we work with, clients, business contacts and so on, with a frank analysis of the costs and benefits of all these approaches, regardless of what may be our "thing."

Happy Mother's Day to all my US blogees.....

Tip of the Week: How are Shell Companies Valued?

A shell company is a company with no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents. To identify and value an appropriate shell for a specific company’s purpose, it is necessary to understand six important characteristics of the shell. These give the prospective buyer a way to gauge the shell’s value and utility for the purpose at hand.


1. How was the shell created?

Shells are created in one of two ways. A shell is created from scratch when a founder or group takes public an empty company whose business plan is to acquire a private company. A shell can also be created after the termination of operations of a “real” public company.

2. Does it have assets and liabilities?

Assets of shells can be significant amounts of cash, an old claim the company is asserting against a third party from its operations, or potentially valuable intellectual property.
In some cases shells also carry liabilities. These liabilities have to be included in the value of the shell, so often management tries to eliminate these liabilities or convert them to equity prior to or upon closing a merger.

3. Is the shell trading or non-trading?

Shells formed from scratch (other than SPACs) generally do not and cannot have their stock trading prior to a merger. Public shells resulting from a former public operating business typically do continue trading. The marketplace for shells deems trading to be positive, and generally values a trading shell higher than one that is not trading.

4. Is the shell reporting or non-reporting?

Some public shells “report” under SEC rules; others do not. A reporting company is obligated to file quarterly, annual, and other regular reports with the SEC and is subject to other rules. Companies that trade on the Pink Sheets often do so without being required to report. A company can also be a “voluntarily reporting” company. These companies are not subject to the reporting requirements but continue to file quarterly and annual reports with the SEC and have their financials audited. The marketplace generally assigns a higher value to a shell that is required to report and is current in those reports.

5. What is the size of its shareholder base?

One major asset a shell has to offer is a shareholder base. The only way meaningful trading in a stock can build is through the addition of a good number of shareholders. Simply put, a public company with 2,000 to 3,000 shareholders is more valuable than one with twenty to thirty. However, the identities of the shareholders, the percentage of the company’s float which they will represent, and the manner in which they became holders all may affect their value to the shell.

6. Is it clean or unclean?

Problems in a shell’s past history or management can adversely affect its current value. The cleaner a shell is the more valuable it is.