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.

Yes We Have a New Name

What's in a name? Well according to my web advisors, a whole bunch of clicks, hits, whatever they call people having more exposure to our humble blog. But in changing our name to the "Reverse Merger & SPAC Blog" there is more than just traffic building in mind.

As you may have discerned from several recent blog entries or know from direct experience, the SPAC market has simply exploded. Hundreds of SPACs done in the last 3-4 years. Every major Wall Street player now doing it. Why is this important? Because SPACs are part of the RM world. A SPAC is nothing but a public shell company that has a lot of cash in it. Because they raise over $5 million, they bypass SEC restrictions on IPOs of blank check companies. Thus, their stock can trade while they are awaiting a merger.

Technically, we know that SPACs are effectively a sub-industry of reverse mergers, since virtually every SPAC combination is indeed a reverse merger. In the past, there would be a panel on SPACs at reverse merger conferences. Now there are full conferences just on SPACs. So more and more people have referred to the industry as a whole as the "reverse merger and SPAC" space. So, again, even though it implies one is different from the other, we know it is not.

But we also know that names tend to stick- let's have a little fun with a few industry terms. The term "alternative public offering," adopted by most industry practitioners to refer to a reverse merger and contemporaneous PIPE, I believe respectfully is a misnomer. It implies there is some sort of public offering, which there is not. It might be called an alternative to a public offering, but alas the industry has overruled my preference for logic and I use the term as well.

Here's another one: "virgin shell." My good friends at DealFlow Media coined this term to describe the Form 10 shells that have proliferated in recent years. Everyone immediately adopted the term, including me. Dictionary.com has many definitions of virgin, and I assume DealFlow meant this one: "pure; unsullied; undefiled." That is an excellent description of the benefits of virgin shells, that they do not have the challenges of "scrubbing" the past one faces with a trading shell that was once an operating business. But definitions of virgin also include "an unfertilized insect." And of course the most common is the well-known sexual reference. My slight beef is that this last reference could be seen to some as implying inexperienced, unsophisticated, and so on, which is not a good connotation obviously.

So names do matter, as I discussed in my book. I'm obviously not in love with the terms "blank check," "blind pool" and even "shell company" (I was not pleased when the papers were describing ex-New York governor Elliot Spitzer's moving money around in shell companies to hide how he was paying for prostitutes). We've eliminated "shell promoter" and refer to "shell management" or "shell founders." Part of the process that we have mostly successfully undertaken to bring our industry out of its long ago past shadows and cement its legitimacy and transparency includes having the right lingo.

So in deference to the tremendous growth of SPACs and the tendency of the industry to refer to them both together, we have changed the name of the blog as you see above. In fact, we also can now be reached at www.SPACblog.com in addition to www.ReverseMergerBlog.com. I will continue to write on all aspects of our growing industry, including shell mergers, virgin shells, SPACs, and other aspects of the small and microcap markets as before. I hope to continue to make you proud of the time you spend here.

Thanks again to all for your incredible support and repeat visits.

Break out the Champagne! Goldman is doing a SPAC

Stick a fork in any remaining taint associated with shells and reverse mergers on Wall Street - it's done. The leading firm on the Street, Goldman Sachs Group, has decided to underwrite a $350 million SPAC, and make some major changes to the typical SPAC structure.

As discussed in the Wall Street Journal today, the big change is with respect to SPAC management. Most SPACs require management to put up as much as 2-4% of the total money to be raised, and then get 20% ownership of the SPAC. Goldman's deal, called Liberty Lane Acquisition Corp., has management putting up less, about 1% of the total raise, and they are getting a much smaller percentage ownership in the SPAC- about 7.5%.

In addition, Goldman is taking a 6% commission rather than the typical 7%. Finally, instead of an offering unit of a share of common stock and a warrant, which are traded separately, Goldman's units will include a share of common stock and a half a warrant.

Two of the criticisms that have at times been made of SPACs include the large management stake and the dilutive effect of the warrant overhang. Goldman clearly has studied this market carefully and determined to address both, all to the benefit of SPAC investors. It will be very interesting to see if this affects how future SPACs underwritten by other firms are structured or whether this will just become "the way Goldman does it."

As I have blogged on recently, the proliferation of SPACs is a win-win for all in the RM space. The fact that what most consider to be the most venerable player in finance is ready to enter the reverse merger world is both astonishing and a very significant milestone.

SPACs are Truly Proliferating

A five minute piece last week on the Fox Business News channel, entitled "Blank Check IPOs." An article on the New York Times online last month called "Wall Street’s New Status Symbol: the SPAC." The article reminds us that Nelson Peltz, Thomas Hicks and now Ronald Perelman have put together SPACs. And it covered the fact that the largest SPAC ever, Liberty Acquisition, went public raising $900 million in December.

There are lots of statistics, and DealFlow Media now publishes a regular SPAC Report that anyone interested in this topic should subscribe to (go to http://www.dealflowmedia.com/). Suffice to say there are over 200 SPACs public or in registration, and the dollar amounts raised keep going up.

For the uninitiated, what is a SPAC? The acronym stands for "special purpose acquisition company." It is, quite simply, a public shell company. Because it raises more than $5 million, it is exempt from SEC restrictions on shells trying to do public offerings. The shells complete an IPO, raising tens or hundreds of millions of dollars. Almost all the money sits in an escrow account while the SPAC's management team looks for a reverse merger to complete with a private company (typically) seeking to be public and utilize the funds that were raised. The management team is generally required to invest and put real money at risk prior to the IPO, but at a significant discount to the IPO stock price. Management usually ends up with about 20% of the stock after the IPO.

Most SPACs have an industry focus and bring in management experienced in that industry to help find a deal. Some are opportunistic and have the ability to pick a company in any industry. Investors in the shell's IPO are given a chance to vote on the proposed transaction, as well as to "opt out" and get virtually all their money back if they prefer not to participate in the deal. In the meantime, while waiting for a deal the stock of the SPAC trades. SPACs generally have to sign up a deal within 18 months and get it closed within 2 years or all the money left in the escrow goes back to investors and the SPAC liquidates.

Companies like Jamba Juice and the third largest hedge fund in Europe have successfully merged with SPACs. These mergers generally take less time than a traditional IPO, and the transaction involves a bit less SEC scrutiny prior to closing (although a thorough proxy statement must be delivered to investors concerning the company to merge in prior to the investor vote on the deal).

As I laid out in my book, SPACs have a number of advantages over a merger with a trading shell without cash, a merger with a virgin shell or a self-filing. But these other options have certain other advantages over a SPAC transaction. The most important asset offered by the SPAC, of course, is the cash. You know it is there, you don't have to wait and see if an underwriter or placement agent can in fact raise the money they say they can raise.

A good friend of mine who is a partner at a major New York law firm said to me a few weeks ago, "SPACs must be acceptable now - we're doing one!" Then again, below the Times online article mentioned above, one commenter noted that SPACS have "about as much prestige and class as having a wife named Bubba." Heck, there are people that feel this way about just about any area of Wall Street if you ask (including, especially, reverse mergers), but so be it.

It is frustrating to see that there is still some negative press on this, and it is getting better for sure. The big negative argument seems to be that it is a "trust me" game where the investor is depending on the talent and skill of the management team to find a deal.

I have several answers to that. First, one could make the same argument about every private equity and venture capital firm. An investor puts money into the fund hoping the fund's partners have good investing skills. No different. In fact in some ways it is worse, as there is zero liquidity in a fund. In a SPAC, the stock and warrants you receive are publicly tradeable, so there is an exit if you choose.

Second, the investors' downside is protected virtually 100%. After expenses and commissions the money is put in a trust (often as much as 93-96% of the original investment). It earns interest. At the end of two years if there is no deal, the investor gets back the 93-96% plus two years' interest, which at 3% per year puts the investor at virtually his original investment. If a deal is presented and the investor opts out, again that same return of funds. Yes one can argue that the investor, typically a fund or institution, loses the opportunity cost of having redeployed that capital somewhere else. Some investors sell the warrants and keep the stock, some do the opposite.

SPAC players have created their own sub-cottage industry within the RM world. There are now separate SPAC conferences, newsletters and the like. There are a small handful of law firms, accounting firms and investment banks that focus heavily on this space. That said there are a number of larger such law firms, accounting firms and investment banks (such as Citigroup, Deutsche Bank and others) who have entered the space successfully.

Of course, whenever someone on Wall Street says some plan or trend could last forever, that's when I typically run for the hills (remember Internet? structured finance? shall I go on?). I don't think I've heard anyone yet say that SPACs could last forever. I will say this surge is lasting much longer than just about anyone expected. And the growth in the legitimacy and acceptability of SPACs, as well as the rapidly growing size of the average deal, have indeed stunned many, including your humble blogger. Finally, the quality of players now entering has put the icing on the cake for those who have spent years working on and perfecting this technique.

As SPACs become more accepted, the rest of the RM world can benefit in its reflected glow. Go SPACs!

Bigger, Bigger, Bigger, Better?

Holy big deal Batman! Several incredible milestones were reached in recent weeks as the PIPE and SPAC markets continue their explosive growth.

First, what appears to be the largest PIPE ever was announced on November 28. According to DealFlow Media's PIPE Wire, the $7.5 billion investment into Citigroup by Abu Dhabi Investment Group was structured as a PIPE, with trust-preferred securities and common stock purchase contracts. Presumably mortgage crisis-beleaguered Citi was attracted by the speed of the transaction. This transaction would seem to lay to rest most, if not all, of the remaining questions about the legitimacy and efficiency of PIPEs.

The second major development is the largest SPAC ever, set up by investor Nelson Peltz. They announced that they are going to raise $750 million for a troubled company. This dwarfs the $550 million raised in September by a SPAC led by Tom Hicks. Considering that the earliest SPACS back in 2003 raised an average of $25 million, this is simply huge.

Related to this is the fact that, according to DealFlow's new SPAC Wire, the 200th SPAC, BPW Acquisition, was filed this past week. SPAC pioneers David Nussbaum of EarlyBird Capital, David Miller of Graubard Miller and Ira Greenspan of HCFP Securities should be mighty proud of what they have wrought.

Not to forget the humble reverse merger. Recent deals financed by the likes of Goldman Sachs and Lehman Brothers took companies public through shell mergers. It was difficult to imagine 10 years ago that any bulge bracket firm would get comfortable with an APO-type structure, but this day also has arrived.

But what does this all mean? Will General Motors do a PIPE? Will Deutsche Bank raise a $30 billion SPAC? What impact does this have on those who choose to remain in the small and microcap space with PIPEs, APOs, SPACs and the like?

My view: it's all good. To the extent that some looked upon these methods of smallcap finance with skepticism, everyone benefits from the entrance of major players to "borrow" these techniques and adapt them to work with larger companies. This assumes that we continue to utilize these approaches to help smaller public companies as well as large ones.

I hope there will always be SPAC players who keep their fundraising under $75 million. I hope that more innovative techniques like WestPark Capital's WRASP structure (more about this in a future entry I am working on) will allow more companies to go public in a clean and straightforward fashion and move immediately to a major exchange. And here's possibly the hardest part: I hope the PIPE investment community, as it sees the chance to be involved in larger and larger deals, remembers the opportunity and dramatic upside possible by continuing to also work with smaller deals into smaller companies. I hope that a segment of the PIPE world will continue to provide "public venture capital" to exciting growing entrepreneurial companies, knowing that greater risk can lead to greater reward. And all while, yes, the larger and larger deals bring greater and greater credibility, legitimacy and transparency to everything we do.