A Shell by Any Other Name?

"Special purpose" companies offer an intriguing prospect for going public in this conservative IPO market.

Pity the young company ready to take the big leap into the capital markets. Pick the traditional initial-public-offering route and you enter a still-lackluster IPO market with uncertain prospects for all but the hottest corporate candidates. Go with a private-equity buyer and you give up control as well as the liquidity only public markets can offer.

Little wonder that more companies are choosing a third, once discredited, option: going public through a merger with an existing shell — in this case, one in the form of a special-purpose acquisition company, or SPAC. In the current IPO market, this offers the best of both worlds for some private concerns.

Take Jamba Juice Co. After rejecting the idea of an IPO in 2005, executives at the San Francisco–based purveyor of fruit smoothies had all but sealed its sale to a strategic buyer. Then they met Steve Berrard. Late last year, Services Acquisition Corp. International (SVI), the SPAC managed by Berrard, purchased and recapitalized Jamba Juice for $265 million. Today it does business as Jamba Inc.

Safety from the SEC

Sometimes referred to as blank-check companies, SPACs represent a growing portion of the IPO market. The 40 SPACs created last year accounted for 16 percent of all IPOs, according to capital-markets analysis firm Dealogic. Meanwhile, the average capitalization for a SPAC nearly tripled over the past three years, to $117 million. Those having completed their IPOs now seek targets in sectors including energy, information services, health care, consumer products, and financial services (see “SPAC-ing Out” at the end of this article).

Since SPACs are publicly traded shells, they have inherited some of the notorious history forged by unscrupulous operators who once used shell companies as fronts for scams. Fifteen years ago, the Securities and Exchange Commission issued Rule 419 to offer some safeguards for investors in shell companies. Many SPACs adhere to Rule 419′s guidelines.

By following Rule 419, a SPAC like SVI launches its IPO, listing no assets, and places in escrow at least 80 percent of the money raised from the offering. It uses the remainder of the capital to cover company expenses. SPAC investors — primarily institutions — are placing a bet on the management group and its deal-making plan, often aimed at sectors where the managers have track records. The SEC guidelines typically give managers 18 to 24 months to buy a company, or they must liquidate and return the escrowed capital to holders.

Flexible Exits

For managers and investors in a target company like Jamba Juice, going public this way offers certain advantages. One is the choice of individual exit strategies. Some original Jamba investors wanted to liquidate their holdings, while others (along with the executive team) wanted to stay involved. The SPAC accommodated both desires. Jamba Juice CEO Paul Clayton and CFO Donald Breen stayed in charge.

As an entrepreneur, “if you want to walk away, you’ll probably sell to a strategic buyer” rather than to a SPAC, says Bob Marbut, CEO of Argyle Security Acquisition Corp., a San Antonio–based SPAC that is exploring targets in the security-equipment business.

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