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Deals Gain Momentum as Investors
Seek Alternative to Private Equity

By LYNN COWAN

The black sheep of the IPO world quietly took over a large part of the market in 2007, with so-called blank-check debuts generating nearly a quarter of all new stocks that listed in the U.S.

There were 66 initial public offerings of blank checks -- also known as special-purpose acquisition companies, or SPACs -- priced this year in deals that raised a total of $12 billion. That is 23% of the total number of U.S. IPOs and 18% of the money raised, according to data from Dealogic. In 2006, blank-check IPOs raised $3.4 billion, accounting for 7% of the total money raised in IPOs and 16% of the number of new issues, a percentage-point increase equaled only by the growth in technology IPOs.

Once seen as deals of questionable quality, blank checks are essentially empty shells that generally give themselves 18 months to two years to acquire an operating company with the proceeds from an IPO.

These IPOs mostly lived under the radar for more than a decade before generating new interest from investors beginning in 2004, when 13 such deals priced. It was around that time that many managers made changes to the structure, including putting in more of their own money, that made blank checks more accountable. Still, it is likely that 2007 will be remembered as their breakout year.

The performance of these stocks is attention-worthy. The Morgan Joseph Acquisition Company Index, launched in 2006 to measure the performance of all blank-check companies that went public since 2003 up to the point that they complete an acquisition, was up 28.25% for the year as of Friday.

The increasing popularity of the structure marks a stark change in the deal-making environment. Blank-check companies are like private-equity firms in their mission to acquire operating companies. But private equity, a rival for acquisitions, has been stung in the past few months by strains in the corporate debt market, which they rely on heavily for financing. Blank checks, by contrast, turn to public stock markets for cash and issuance has kept going strong. Some investors like them because the structure offers a quicker route to cashing out of their investments than does private equity.

Wall Street has noticed. SPACs used to be underwritten primarily by smaller investment banks like Morgan Joseph & Co. and Ladenburg Thalmann, but big Wall Street firms and some big names in the world of deal making are joining in. Names such as Citigroup Inc., UBS AG, Deutsche Bank AG, Credit Suisse Group, Lehman Brothers Holdings Inc. and Merrill Lynch & Co. increasingly are showing up on prospectuses alongside the typical blank-check underwriters. Players such as Nelson Peltz and Ronald Perelman also are involved.

As larger underwriters have become involved, the amounts raised in such deals has increased to a half-billion dollars or more from less than $100 million just a few years ago.This month, a deal launched by Citigroup and Lehman, Liberty Acquisition Holdings Corp., raised $1.03 billion, a feat achieved by only a half-dozen "regular" IPOs in the U.S. in 2007. Liberty is the vehicle of billionaire Nicolas Berggruen, head of an eponymous family-owned investment vehicle with assets of more than $1 billion.

London hedge-fund manager GLG Partners Inc., the largest alternative-asset manager in Europe, became a publicly traded company this year after being purchased by Freedom Acquisition Holdings Inc., an empty shell headed by Mr. Berggruen that raised $480 million in 2006 through Citigroup.

"I think everyone has been a bit surprised by the volume that has been done," says Jeffrey Bunzel, head of equity capital markets for the Americas at Credit Suisse Group, which managed the November $400 million launch of Heckmann Corp., headed by Richard J. Heckmann, former chief executive of sporting goods maker K2 Inc. "If the level is running at 20% to 25% of the total IPO market, it's hard to ignore that."

Citigroup bankers say one reason they began to underwrite such deals was investor demand for private-equity type investments with shorter timelines than actual private-equity funds. The investment bank became more involved after underwriting Boulder Specialty Brands Inc., which went public in 2005 and this May acquired Smart Balance Inc., a food marketer best known for its trans-fat-free margarine.

"It became attractive to us only when we believed that M&A targets were taking these offers seriously, and when we saw that the management of these companies was truly capable of going out and sourcing acquisitions," says John Chirico, head of U.S. equity capital markets at Citigroup.

The management teams of several recent blank checks that have either priced or registered include Dallas billionaire and Texas Rangers owner Thomas Hicks; billionaire activist investor Nelson Peltz; Starwood Hotels & Resorts Worldwide founder Barry Sternlicht; and Warren G. Lichtenstein, chief executive of hedge fund Steel Partners.

"This is the most innovative product that Wall Street has created in a long time," says Simon Rose, chief executive of investment bank Dahlman Rose, who once dismissed SPACs as mere "junk." Over the course of the past year, his views changed, and the firm, which specializes in the energy sector, expects to underwrite six to 10 SPAC offerings in 2008.

The segment has become so popular that hedge-fund manager Context Capital Management LLC is changing the focus of its multistrategy Context Opportunistic Fund and plans to invest more than 80% of its assets in blank-check offerings; to date, Context has invested in more than 50.

"The main advantages are liquidity and transparency," says William D. Fertig, chief investment officer of Context Capital. "If investors put money in a private-equity fund, they might get it back in four to five years. They have no say over what the fund buys. In a [blank-check company], investors get to call the shots." If shareholders don't like the proposed acquisition, they can get their money back, less fees, and walk away, even if the majority votes for a deal, he adds.

Blank checks aren't perfect. "A lot of deals get done that shouldn't get done," Mr. Fertig says. "The management team gets 20% of the company's stock for a relatively small investment. Their incentive to get a deal done does not necessarily translate into getting a great deal done."

Write to Lynn Cowan at lynn.cowan@dowjones.com