Special Purpose Acquisition Companies (SPACs)

A special purpose acquisition company (aka blank check company) is an investment company that is created for the sole purpose of acquiring an interest in another company with the hope of making a profit from the acquisition. The companies can be acquired through a merger, stock exchange, asset acquisition, reorganization, or business combination. Some current SPACs include Liberty Acquisition Holdings (LIA.U), GLG Partners (GLG), and Services Acquisition Corporation. (Services Acquisition Corporation merged with Jamba Juice in 2006, and changed its name to Jamba, Inc. JMBA.) The money for the acquisition is obtained through an initial public offering (IPO), also called a blank check offering, without knowing which company will be acquired or even what type of business it will be—hence, the synonym, blank check company. SPACs are marketed as a way for the average investor to invest in private equity.

SPACs are similar to blind pool limited partnerships, where the limited partners invest without knowing specifically what the general partner will do with the invested funds. Because there is no business to evaluate, such companies must be evaluated by the experience and success of the principals, who invest their own money, find the potential acquisitions, and run the business if an acquisition is made. The acquisition must be made within 18 to 24 months; otherwise, the SPAC must be liquidated, and the shareholders' money, which is held in an escrow account that earns interest, must be returned to them, minus the costs of looking for a company to acquire. If a suitable acquisition is found, the SPAC must seek shareholder approval for the acquisition.

The principals who create the SPAC, unlike the shareholders, do not get their money back, which may cause them to choose any target, even if it has little potential for profit. If the principals do buy something, then they can sell their shares in 6 months to a year. Not surprisingly, most SPACs have been losers.

Many blank check companies were created in the 1990's, but most of these were fraudulent, and subsequently went bankrupt.

Because some of the recent private equity deals have yielded good returns, there has been greater interest in SPACs recently. In 2007, there were 66 initial public offerings for SPACs for a little more than $1 billion. Many of the major banks are also considering creating SPACs for the investing public.