Blank-Check Bankers Have a Spotty Past

Clearly, a lot of investors agree with Nussbaum. Investors, mostly cash-rich hedge funds, have sunk more than $650 million into eight completed blank-check offerings over the past two years, even though only one of those companies has found an actual merger partner.

Some of the hedge funds that have made multiple investments in blank check offerings, according to regulatory filings, are Fir Tree Partners, Hummingbird Management, Polar Securities and Woodland Partners. Woodland is led by Barry Rubenstein, the co-founder of Wheatley Partners, a New York private equity firm that has provided financial backing to EarlyBird.

But those hedge funds and other blank check investors haven't gotten much bang for their buck. To date, only one of the newest crop of blank check deals has found an actual merger partner.

Last August, Millstream Acquisition, which raised $21 million in a deal led by EarlyBirdCapital, acquired NationsHealth(NHRX), a small, profitless medical supply company. Shares of NationsHealth most recently traded at $5.87, a bit below the $6 offering price, which also included two warrants to buy future shares.

Given that sorry track record, it's mystifying to some why blank checks have become hot again. Indeed, some investors in blank checks say they are beginning to sour on them because they feel like they are tying up cash in a dead-money investment.

"I'm completely SPAC'd out," says Paul Sonkin, a hedge fund manager with Hummingbird Management and an adjunct professor at Columbia Business School, who has invested in blank-check IPOs for Ardent Acquisition(AACQ) and Rand Acquisition(RAQC).

Sonkin says the allure of blank checks is the ability to get into a potential corporate buyout situation on the cheap. But he says it takes too long for deals to be consummated. Right now, he says, the only ones making money off blank checks are the investment firms that are collecting fees for underwriting the IPOs.

Investment banking fees and expenses in a blank-check deal, on average, total about 10% of the gross proceeds raised in the IPO.

"I've told [the bankers] not to call me anymore," says Sonkin.

The insiders who put these deals together also stand to make a bundle if a merger gets done. Because the company has no operations, the founders don't have to invest a lot of their money as seed capital. And the sliver of money they do pony up often buys a bushel of stock at a deeply discounted price.

While the founders wait for a merger to come their way, they typically collect rent money for providing office space to the fledgling start-up.

Of course, blank checks do have plenty of supporters. Blank-check boosters say the deals are relatively low-risk propositions because investors can get most of their money back if the company doesn't find a merger partner within 18 months. An IPO investor also can get back most of his money back if he doesn't like the company chosen as a merger partner.

The SEC requires blank-check companies that raise cash in an IPO to put the proceeds, minus expenses, into a bank account. Most blank-check companies are putting money into interest-bearing accounts.

"To me, it provides an almost no-lose situation," says Gary Stein, a private investor who says he has invested in several blank checks. "You're getting 80% to 90% of your money back if you want it."

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