A Shell by Any Other Name?

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

Breen and Clayton had rejected doing their own IPO, Breen says, in part out of concern that the company’s short-term volatility would spook investors and overshadow its steady same-store sales growth. In contrast, SVI’s managers understood the explanation that Jamba managers gave. It’s not that SPAC investors are less selective than investors in a traditional IPO; it’s just that fewer underwriters are willing to write IPOs in the $30 million to $100 million range.

Like many of their peers, Jamba’s executives and investors preferred going public to tapping the private-equity markets. That’s a common feeling, according to Sheldon Goldman, senior managing director with broker-dealer Goldman Advisors LLC. Private-company managers like the liquidity, while investors prefer the superior governance of the public markets. “It was the right decision for us,” says Breen. Jamba received a stronger capitalization — $265 million — than it would have with a traditional IPO.

Acquisition-by-SPAC can also bring much more cash into a young company than either a simple IPO or a private-equity infusion. In January, PharmAthene Inc., a private developer of countermeasures for biological and chemical weapons, announced it would be bought by Healthcare Acquisition Corp., a SPAC that had raised about $70 million through its IPO. “This allows us to accelerate product development,” says PharmAthene CFO Christopher C. Camut. Based on typical biotech multiples, his firm would have raised only about $20 million to $35 million in an IPO, he figures.

Indeed, the weak IPO market makes SPACs a more attractive alternative for entrepreneurs. “In the last five years, there’s been a retreat from the small and midsize IPO market by investment banks,” says Brett Goetschius, editor of Reverse Merger Report. Moreover, notes Neil Danics of SPAC Analytics, “with an IPO, you’re subject to the mood of the market.”

Not for Everyone

SPACs are not the perfect alternative. For one thing, only certain types of companies make good targets. Most SPACs seek established operations that generate operating cash flow and can display several years of audited financial statements. For another thing, there’s no guarantee a deal will be completed. Even if an acquisition is proposed, both the SEC and the SPAC’s investors — typically at least 80 percent of them — must approve it.

Then the company must deal with accounting regulations, which generally weren’t written with SPACs in mind. “This was a unique transaction that will require a lot of interpretation,” notes Jamba’s Breen. When it came to qualifying for an exemption from filing deadlines for Sarbanes-Oxley’s Section 404 internal-controls provision, “we applied and got it,” he says. But in general, when it comes to dealing with the SEC, “there is no clear-cut documentation or ruling that would give you comfort.”

While it’s hard to predict whether the current popularity of the SPAC approach will continue, some think the outlook will be clearer by year-end. Brian North, an attorney with Buchanan Ingersoll & Rooney, notes that the 30 SPACs that went public in 2005 now are reaching the two-year deadline for making an acquisition or liquidating. If the liquidation rate is low, investor enthusiasm may get yet another boost. If not, interest may die down.

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