The market for "blank check" IPOs is getting spooky.The latest start-up that's seeking to raise cash so it can buy a business that it hasn't found yet is a two-week-old company that lists former Central Intelligence Agency Director George Tenet as one of its five board members. Granahan McCourt Acquisition Corp., officially incorporated on July 10 by telecom magnate David McCourt, hopes to raise $125 million in an upcoming initial public offering. The money raised in the IPO, according to the prospectus, will be used to finance the acquisition of "operating businesses in the telecommunications and media industries.'' The stock deal is being underwritten by Deutsche Bank ( DB), which suddenly has become a big player in bringing blank-check IPOs to market. Over the past three years, there has been a wave of blank-check IPOs, with most of the six dozen or so deals underwritten by a cadre of small investment firms such as Maxim, Ladenburg Thalmann ( LTS) and Morgan Joseph. But in recent months, big Wall Street firms such as Deutsche, Citigroup ( C) and Merrill Lynch ( MER) have fallen in love with blank-checks IPOs and are beginning to churn out deals like automobiles on an assembly line. Critics say the Wall Street firms are warming up to the blank-check market at just the wrong time and that many of the deals they are peddling could prove to be lemons. "The way the Wall Street money machine works is the big investment bankers will go wherever the money is. But they are getting in late,'' says Paul Sonkin, a hedge fund manager with Hummingbird Management, who has invested in several blank-check IPOs. "We are not buying any deals now because they are all trading down in the aftermarket.'' But the poor reception several blank-check deals have received of late isn't deterring Wall Street.
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."