Are Blank Check companies worth checking out?

I surf hundreds if not a thousand stock charts per day and one unusual type of chart has been cropping up frequently on the “New High” hot list. They all have a very similar price pattern:  thinly traded and under $10. They also have another feature in common—the word “acquisition” is in the majority of titles. Evidently, there’s more here than meets the eye. Summoning up my inner Nancy Drew, I whipped out my magnifying glass and subjected these companies to closer scrutiny.

Blank Checks or SPACs 
It turns out that they’re what is known as special purpose acquisition companies, or SPACs. But they’re more commonly known as “blank check” companies because that’s really all they are. Think of them as another sort of private equity vehicle in which investors buy units in the company whose sole purpose is to use these pooled funds to acquire one or more companies. The reason they’re called “blank check” is because that’s what the investor is giving the company—a blank check for the company to select any (or no) targets for take-over. Because this is a blind-faith gesture, investor confidence is anchored to the reputations of the company principals.

The SEC has rules for blank-check companies. At least 80% of shareholder monies must be used in all acquisitions, and each acquisition is subject to shareholder approval. If the company cannot find or execute at least one transaction by a given date (generally two years from inception), the monies plus accrued interest and less operating expenses are returned to the shareholders.

Most blank-check companies IPO around $10 per share, but they can also raise money without shareholder approval by issuing other classes of stock. Many do this as a poison pill to prevent hostile take-overs. Some of these companies have more than one class of preferred stock and it’s difficult if not impossible to distinguish one from the other. A major problem in researching this field is that there is little to no information on blank-checks which could very well explain their sparse trading volumes.

There are probably sixty to hundred blank-check companies trading on US exchanges. The major players trade on the AMEX, and there’s less than forty of those that I was able to identify. Below is a list of the top ten players according to market cap:

blank-check-cos-7-31-09

And here’s a weekly chart that is representative of most:


hicks-acquisition-chart-7-31-09

You can see that prospects for M&A activity fell off a cliff along with the rest of the market last fall, but blank-check stocks have been making a slow, steady comeback. I don’t know how much higher they can go especially considering that many don’t have much time to effect an acquisition, but what this space is telling us is that there’s a lot of faith that M&A activity will rebound, and soon. It’s also interesting to note that the preferred stocks (or what I’m assuming to be the preferred stocks) of these companies are busting through the roof along with the preferred stocks of many other financials.

It could be that the real story behind the blank checks does not lie with the companies themselves, but with what they reflect as far as investor optimism. And if I have to write a check based on that indicator, it would be a big one.

2 Responses to “Are Blank Check companies worth checking out?”

  1. I wrote about SPAC arbitrage back in January:

    http://thedealsleuth.wordpress.com/2009/01/28/spac-liquidation-arbitrage-how-to-profit-from-hedge-fund-redemptions/

    As of today, the spreads have narrowed to single digit yields. Those SPACs that have actually completed acquisitions are down for the most part:

    http://thedealsleuth.wordpress.com/2009/07/28/cash-shells-spacs-mathstar-petrosearch-and-cadus/

  2. admin says:

    Thomas,

    Thanks so much for your article references. They didn’t show up on my search since I was only searching for blank check companies. I wish I had them when I was researching the article, and I suggest my readers reference them for further information on SPACs and blank check companies.

    Too bad the arbitrage situation is no longer available–what a great opportunity I missed! Although as you say, trading them might have not been easy and it’s tough to tell what the bid/ask spreads might have been.

    BTW, can you shed any light on the different classes of stock that many SPACs seem to have? Some of them have been doing exceptionally well.

    Thanks in advance. Your knowledge of this little known area is much appreciated.

    Dr. Kris

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