A Hard Shell

Managers of special purpose acquisition companies, or SPACs, are on the hunt for merger targets.

Don’t be afraid of Robert Kay. Yes, as chief executive officer of Global Technology Industries, a fledgling special purpose acquisition company, or SPAC, he’s looking to acquire a company — maybe yours. But he says he’s not a job threat to the CFO of GTI’s as-yet-unknown target.

That’s true even though Kay is a former finance chief himself. He served as senior vice president of finance and CFO of Oxford Resources Corp., a NASDAQ listed consumer finance company (now known as Nationsbank Auto Leasing), from 1994 until Oxford was sold to Bank of America in 1998. Later, he headed up finance at Tiffen Manufacturing Corp., a maker of photographic and imaging products.

Management teams of other SPACs might choose to place themselves at the helms of the businesses they acquire, but the CFO of a company melding with Kay’s SPAC would likely stay put. Unlike private-equity managers looking for a quick turnaround, he contends, his purpose is to use GTI as a platform to build companies over a relatively long haul. Indeed, a good finance chief might be part of the lure of an acquisition target. “You want to look at talented management that wants to grow its business,” he says.

Still, Kay and his partners have a long way to go before they join the current wave of new SPACs and start their quest to acquire an operating company. Having filed an S-1 with the Securities and Exchange Commission on March 17, they have to wait for an approval, perform a road show, print a red herring (a preliminary registration statement), and launch an initial public offering over the course of the following two months or so.

In contrast to the cash raised by other kinds of IPOs, most of the funds spawned by an offering like GTI’s remain in a trust account and are invested in government securities until the management team’s goal is fulfilled. For most SPACs, that goal is to use those funds to buy a privately held operating company in a barely specified industry.

In GTI’s case, the industry is “industrial technology.” The reason for the vagueness is that, under securities law, the managers of a SPAC have an extremely tight deadline — 18 months from its initial registration — to come up with an apt operating-company mate. Given that time frame, they need an extremely broad universe for their search.

Practical though such cloudiness of purpose may be, it has lent a certain taint that even the current squeaky-clean generation of SPACs can’t seem to entirely shake. Long known as “blind pools” and “blank check” companies, they seemed at first to ask investors to place too much faith in the management teams who put them together.

In the 1980s, “pump and dump” scams provided ample fuel for the doubters. In perhaps the most notorious deal, participants orchestrated a sham IPO for a shell called Hughes Capital Corp and acquired all the offered units. Then they artificially inflated the securities’ price by spreading false information about Hughes Capital’s expansion plans and sold the securities at a hefty profit.

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