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Burnishing the Blank Check

An underwriter's unusual concession suggests that the private equity surrogate is saturating.

It's not every day that an investment bank voluntarily defers the bulk of its fee in order to sell an initial public offering.

But that's what

Ferris Baker Watts

has decided to do in order to find investors for a planned $120 million IPO for

India Globalization Capital


A recently amended registration statement for the stock deal says Ferris won't be able to collect two-thirds of its $9.6 million banking fee until India Globalization completes a merger with a company doing business in India. Moreover, if the so-called blank-check company can't find a suitable merger partner within 18 months of the IPO, the Washington, D.C.-based investment bank will forfeit the roughly $6.6 million held in escrow.

Blank-check filings are made by shell companies that promise to use the proceeds of their IPO to buy an existing business, one that they've yet to identify. They're billed as an easy way for investors to play the private-equity game, a realm usually reserved for institutions and the very rich.

The unusual escrow and forfeiture provision in the India Globalization stock deal is an indication that the market for blank-check deals has reached the saturation point.

This year alone, some three-dozen blank-check companies, including India Globalization, have filed IPOs, and the number keeps growing. Since the explosion in blank-check stock deals began early last year, 26 IPOs have begun trading, raising more than $1.1 billion from investors.

But of the recent crop of blank-check IPOs, just one company,

Millstream Acquisition

, has completed a merger. Four other blank checks say they have tentative agreements with potential merger partners, but those deals have not been finalized.

The difficult time blank-check companies have had finding merger partners is starting to make some hedge funds think twice about investing in these deals, even though bankers are pitching them as no-lose propositions.

Up until now, investment bankers have had great success peddling blank checks as low-risk private-equity plays. That's 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 most of his money back if he doesn't like the company chosen as a merger partner.

But the prospect of a potentially dead-money investment is souring some investors on blank checks.

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"It appears in order to get these deals done, the underwriters are having to sweeten them,'' says Paul Sonkin, a hedge fund manager with Hummingbird Management and an adjunct professor at Columbia Business School who has invested in several blank-check IPOs. "It sounds like what's happening is that until something gets done, the institutions don't want anyone to get paid."

Indeed, one of the criticisms of blank-check IPOs is that the only ones getting rich off of them are the small investment firms that have been churning them out like widgets. To date, most of the biggest underwriters of blank-check deals have been little-known firms such as



Broadband Capital Management


Maxim Group


Morgan Joseph


Recently, bigger investment banks such as Ferris,

Oppenheimer & Co.

(OPY) - Get Oppenheimer Holdings Inc. Class A Report


Wedbush Morgan

are looking to get into the game.

According to a person familiar with the firm, the move by Ferris is an attempt by the investment bank to distinguish its offering from the other cookie-cutter blank-check IPOs that have flooded the market. Officials with Ferris declined to comment on their motivation behind the escrow and forfeiture provision.

It appears Ferris was having a tough time selling the India Globalization deal. The initial registration statement for the IPO, which was filed in May, did not include any escrow or forfeiture provision. The first mention of the provision was in an amended registration statement filed on Aug. 15.

The escrow and forfeiture provision, however, could provide some additional peace of mind for investors. With a large chunk of their fee being held back, the bankers at Ferris have an added incentive to work harder to find a merger partner for the company.