Bad Bounce for Blank-Check Companies

Investors seem to be increasingly backing away from these speculative IPOs.
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The air is coming out of the bubble in IPOs of so-called blank-check companies -- fledgling concerns in search of a business plan.

The pace of new initial public offerings from blank-check companies is slowing to a trickle, after a flood of stock offerings began hitting two years ago. Worse, some of those early deals are beginning to unravel as the companies have been unable to find merger partners.

Some of the hedge funds that have been sinking money into blank checks are beginning to turn elsewhere, hoping to catch bigger returns by investing in companies that already have functioning businesses. And one of the biggest investors in blank checks, Amaranth, imploded in September when it lost $6 billion in the span of a week on a series of bad natural gas trades.

Meanwhile, some highly touted blank-check deals have had trouble getting done.

Services Acquisition

(SVI)

has twice extended the deadline for completing its

much-anticipated $265 million merger with smoothie chain Jamba Juice. The deadline for approving the deal is now Nov. 17.

Another high-profile blank-check deal that's still pending is the planned $260 million merger of

Acquicor Technologies

(AQR)

and Jazz Semiconductor. Acquicor is the blank check sponsored by

Apple

(AAPL) - Get Report

co-founder Steve Wozniak and led by other former Apple executives.

Wall Street has been marketing blank checks as a relatively safe way for hedge funds and others to invest in private equity-type deals. 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 on management's ability to pull a rabbit out of the hat.

But with the traditional private equity market booming, having raised $159 billion in new money this year, blank checks are losing a bit of their luster.

Just nine blank-check IPOs have come to market since July 1, raising a total of $842 million from investors, according to Dealogic. But one deal, a $300 million stock offering from Marathon Acquisition, accounted for much of that sum.

By contrast, Wall Street was awash in blank-check IPOs in the first half of the year. In the first six months of 2006, Dealogic says 25 blank-check IPOs were completed, raising $1.7 billion. In 2005, 29 blank-check companies took in $2 billion.

To be fair, not everyone is pessimistic about the future of blank checks. One analyst who follows the sector says it was only natural that the pace of deals would slow. Fans expect investors to start warming again once they see more deals getting done.

The trouble is that given how long it's already taken for the initial round of blank checks to complete deals, it's not clear investors have that much more patience.

And of the 67 bank check companies that have completed IPOs over the past three years, only nine have completed mergers. Another 19 blank-check concerns have tentative agreements to merge with existing businesses. That means more than half of the blank-check companies have yet to fulfill their stated mission: finding a company to acquire.

In all, there's roughly $4.4 billion in cash raised from investors sitting in bank accounts waiting for blank-check companies to complete deals, says Maxim Group, a small investment firm that is one of the leaders in underwriting blank-check IPOs.

Investors are starting to getting impatient about all that cash sitting on the sideline.

On Thursday, shareholders of

Coastal Bancshares Acquisition

(CBAS)

, which raised $29 million in a February 2005 IPO, voted to liquidate the company rather than approve a proposed merger with Intercontinental Bank of San Antonio, Texas. Next month, investors in

China Mineral

(CMAQ)

, which raised $24 million in an August 2004 IPO, will vote whether to liquidate that company.