New York – In a recent wrinkle in the IPO market, firms are going public before having a company to take public. The financial vehicle that lets this happen is called a SPAC – Special Purpose Acquisition Company. According to an article in Monday’s Wall Street Journal (Acquisition Vehicles Gather Stream, 6/18/07), there have been 30 SPACs listed this year for a total of $3.5 billion. If this rate keeps up, the SPAC market will double from last year’s total, when there were 40 SPACs listed for a total of $3.4 billion. Additionally, the average deal size has increased from an average of $84.5 million to $115.9 million. The largest SPAC so far was the December 2006 listing of Freedom Acquisition Holdings Inc., which raised $528 million.

How they Work

In a SPAC, money is raised from investors and the SPAC is listed on an exchange. SPACs (also know as blank check companies) are empty shells that are looking for appropriate companies take public via an IPO. The SPAC then uses the proceeds from the IPO to buy shares of the new public company.

While investors in the SPAC initially do not know what company will be recommended, they have the right to vote on the proposed company prior to the IPO. As a result, there may be situations where no company is found, or where the one suggested does not receive enough votes to proceed.

After the SPAC is listed, there is a pre-defined timeline (generally between 1 and 2 years) within which it must find a target IPO company. As such, there are three potential paths for the SPAC, with two outcomes: 1) the SPAC may not find an appropriate company and the funds will be returned to the holders along with a return of capital; 2) the investors may vote down the proposed IPO candidate and the funds will be returned to the holders along with a return on capital; 3) the SPAC is approved, the company is taken public, and the holders purchase the stock of the newly public company.

Where to Get Research on SPACs

In terms of the analysis surrounding a SPAC, from its listing to its eventual IPO or demise, there is only one research company that comes to mind that is focused solely on this area. SPAC Analytics is run by Neil Danics and has a service that tracks SPACs from cradle to vote.

IPO analysis firms or analysts also have a grip on the valuation of an IPO, but they typically have expertise at valuing private companies that have already chosen to execute an IPO. As such, their sweet spot is probably after the target has been recommended and prior to the vote. Alternative research firms that have expertise in the IPO space include: IPO Financial, Renaissance Capital and IPO Value Monitor.