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Acquicor Tech Enjoys Apple's Halo

Kevin Kelleher

The IPO propsectus is more than a detailed introduction of a company going public. It's the stock market's Breathalyzer: Its reading can tell you whether executives and investors in a company are operating under the influence of some reality-distorting substance.

And there are some hearty fumes coming off the prospectus from Acquicor Technology, a Newport Beach, Calif.-based company founded by Gil Amelio, best remembered as a former CEO of Apple Computer, who, in exchange for a $2.5 million-a- year salary and a $5 million loan, presided over declines in Apple's earnings, market share, headcount and stock price.

After Steve Jobs replaced Amelio, Apple's stock rose nearly 20 times over. Amelio went on to become a venture capitalist and consultant. One of his firms, AmTech, went bankrupt in 2003.

(Acquicor's filing includes this odd and somewhat defensive insight into the mind of Amelio: "Although the stock price of Apple Computer did not rise during Dr. Amelio's tenure as CEO, he believes that the changes he made while CEO laid the foundation for the rise in the price of Apple Computer common stock after his departure.")

Now at Aquicor, Amelio is being joined by two other Apple alumni: Ellen Hancock, who, after a stint as Apple's chief technical officer in the mid-1990s, headed up Exodus Communications, which filed for bankruptcy in 2001; and Steve Wozniak, who co-founded Apple with Jobs 30 years ago and whose most recent venture, Wheels of Zeus, shuttered its doors on Friday.

Those pedigrees were the primary reason Acquicor raised $150 million in an IPO Tuesday. Its stock has risen some 13% since then, trading at $7 recently on Monday.

So, where is the $150 million Acquicor raised going to go? Well, $8.3 million went to pay for the IPO. And the rest is going to...well, nobody really knows much about that. But Amelio and Co. are hoping to buy some really neat stuff.

And that's the punch line. Acquicor has no revenue, no profit (only a modest a loss of $6,273), and because it was founded last August, it's had no business operations whatsoever. Its sole purpose to date has been ensuring that the company goes public, with no business model in mind other than going public.

That business model isn't as unusual as you may think. It's called a "blank check" company, and it's essentially a poor man's buyout fund. Blank-check firms raise capital and buy other companies, hoping to make more money along the way. It's a simple-enough plan, but it's bedeviled even the greatest financiers.

(To see Senior Writer Matthew Goldstein's take on the blank-check market, click here and here. To Goldstein's story on former NBA star Tom McMillen's foray into these deals, click here.)

Investors get their money back if the blank-check firm fails to find enough companies to buy within 18 months. That limits the downside, but doesn't mitigate the fact that these companies also go against nearly every bit of investment wisdom. It's Peter Lynch turned on his head: Instead of investing in what you know, you invest in a black box.

In the 1980s, blank-check offerings flourished, until the Securities and Exchange Commission cracked down on them, when many failed to adequately report their financial condition. Now, thanks to hedge funds -- many of which enjoy a bit of edge-play -- blank-check IPOs are back. Acquicor counted 43 of them since August 2003, holding an aggregate $2.5 billion in trust. Most of them are traded over the counter, although Acquicor found a home in the slightly more respectable American Stock Exchange.

With his blank-check IPO, Amelio achieved a beautiful piece of financial alchemy, spinning gold out of thin air. According to the prospectus, Amelio created the company, then lent it $275,000 of his own money -- all of it spent on preparing Acquicor for its IPO. He's been earning interest at 3.6% on that loan.

Then Amelio awarded himself nearly 5 million shares, most of them purchased at less than a half-cent a share. Lead underwriter ThinkEquity also got to buy 1.25 million shares for a cool $100. When Acquicor went public, Amelio was not only reimbursed for his loan, his 16% stake in the company was suddenly worth $30 million. Not bad for a company without a cent in revenue.

That may not be the end of it: Acquicor says it's authorized to issue more than 90 million additional shares priced at 1/100th of a penny a share.

There's more in the prospectus to either amuse or frighten readers, depending on whether or not they are shareholders. Some highlights: "You will have no basis upon which to evaluate our ability to achieve our business objective"; "none of our officers or directors is required to commit their full time to our affairs"; and "the personal and financial interests of our directors and officers may influence their motivation in identifying and selecting target businesses."

Translation: We may fail at this, and if we bother to show up for work, it may be simply to use your money to buy companies we already own.

The corker, however, is this: "You will not be entitled to protections normally afforded to investors of blank check companies under federal securities laws."

That's right. The federal laws protecting investors don't apply here. Specifically, Rule 419, which requires funds raised by blank-check companies to be put into an insured escrow account. Acquicor is putting its money in a trust account "located at Lehman Brothers." The key word there is trust.

Also, Rule 419 says blank-check companies can't trade their stocks until they actually buy another company, and that investors be refunded if no acquisition has been completed within 18 months. Acquicor brushed those provisions aside as well.

Still, Acquicor may not be quite the moon shot that many blank-check companies are. With the experience and connections provided by Hancock and Wozniak, Acquicor could deliver on its promise and reward investors with handsome returns.

What's disturbing is how readily funds put their capital into a company that, for all its star power, doesn't seem to have the interests of its shareholders as a top priority. That smells a little like an early-stage financial bubble, when funds get antsy about sitting on cash and grow desperate to stick it somewhere, anywhere.

Acqucor is faith-based investing taken to the extreme. That it even got through the gates is a little startling. But keep watching: Whether it proves to be an exception or a general rule will show how intoxicated investors are getting with technology stocks.