Company Man Draws Blank

In the past two months alone, Deutsche has been the lead underwriter on four blank-check IPOs for companies with names like Tailwind Financial, Churchill Ventures, Boomerang Holdings and NTR Acquisition. In the NTR Acquisition deal, which seeks to raise $250 million to buy an unspecified petroleum industry business, Deutsche is sharing the underwriting honors with Citigroup.

Besides the NTR stock deal, Citigroup has been a lead manager on two recent IPOs for blank-check companies, which are sometimes called "special-purpose acquisition companies.'' Merrill Lynch is the underwriter on two blank-check IPOs.

The large Wall Street investment banks are embracing blank checks in part because they are relatively easy to put together. Because there are no financials or operating histories to review, the bankers need only do a minimum of due diligence on the companies. And the big banks, unlike smaller firms, have a ready supply of hedge funds and wealthy investors to sell these deals to.

To date, hedge funds have been the main investors in such deals, and Wall Street has marketed the offerings as a relatively safe way to invest in private equity. Investors in a blank-check IPO are guaranteed to get back most of their money if the company can't find a suitable business to acquire within 18 months. In essence, an investment in a blank check is a gamble on the resumes of the company's management team and its ability to pull a rabbit out of the hat.

But already there's some indication the customers of the big brokerage houses are balking at blank checks.

Investment bankers at Merrill Lynch recently pulled the plug on a $125 million IPO for Catalytic Capital Investment Corp. A person familiar with the offering says the deal was postponed because of the overall weakened market condition for IPOs and the glut of such deals already in the market.

Part of the problem with blank checks is time. Investors are finding it's taking too long for companies to complete mergers. Of the roughly 65 blank-check companies that have gone public since August 2003, only eight have actually completed a merger with an existing business. Another 19 companies have tentative merger agreements.

But that means there are around 39 blank-check companies, with a little over $3 billion in cash on hand, still looking to make deals. The math for blank-check enthusiasts looks even worse when factoring in the 43 IPOs in registration that are seeking to raise an additional $3.6 billion from investors.

"You have to start getting some deals done,'' says Sonkin. "There is too much supply, and there is no demand."

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