Reverse Mergers became more legitimate when the New York Stock Exchange announced its intention to reverse merge into Archipelago. Special Purpose Acquisition Corporations (SPACs) have gained even more popularity over the past year or so. The following are a few of the kernels of wisdom included in Gateway Research’s Special Report on Reverse Mergers and SPACs:
• SPACs typically raise much more money than reverse mergers at the time of their IPOs. The average SPAC raised $30 million as the result of its IPO as compared to an estimated $5.24 million raised by companies going through reverse mergers in the months immediately preceding and following the completion of their IPOs.
• Richard Tullo, senior analyst at Gateway Research, calculated that the average SPAC market capitalization is $72.4 million as compared to a capitalization of $40.5 million for Gateway’s sampling of reverse merged IPOs.
According to Adam Gottbetter of Gottbetter & Partners:
• Companies that go through reverse mergers are often able to choose the investors in their private placements. (Conversely, in an IPO, you don’t get to choose your investors.) In reverse mergers, the investors receive stock that has to be registered. Thus, investors in reverse mergers tend to be committed to the company on a longer-term basis.
• Hedge funds are replacing the mid-sized and small investment banks in terms of providing capital to companies that are executing reverse mergers. Hedge funds are willing to take some of the risk that reverse merger transactions inherently have.
According to Ralph DeMartino of Cozen O'Connor:
• Today there are over $2 billion worth of SPACs in registration, well over $0.5 billion has been funded and there is a lot more than that combined amount on the shelf ready to file….I suspect that the number of warrants included in the unit will decrease overtime. I suspect that the management teams will become of a higher grade and much more targeted in terms of their target acquisition company. And I think that the open issue on SPACs is going to be to what extent the existing SPACs that are out there have success in acquiring companies at a decent valuation.
According to Spencer Feldman of Greenberg Traurig:
• We like shells that have an existing business going on and that do not disclose in their SEC filings that their only purpose is to find another company to merge into it. We like companies that are registered under 15D, so they don't have to immediately comply with the proxy rules. We also like shells that have capital structures that are conducive to these transactions.
According to Sarah Hewitt of Brown Raysman Millstein Felder & Steiner LLP:
• A SPAC has the benefit of offering a clean, pristine shell with no lingering liabilities. It offers a slug of cash that is available both for the acquisition and hopefully also for working capital for the company. And it offers a management team with a great deal of both capital markets and M&A experience, and possibly also industry experience in the sector in which it's targeted. In a reverse merger transaction, you are working with a pre-existing vehicle.
• A SPAC is similar to a blind pool trust in that you are unsure of the target that's going to be acquired. However, in a SPAC transaction, the investor gets a second bite at the apple in that the SPAC undertakes to get shareholder approval of the transaction before it's undertaken. And so, the investor has a choice whether to stay with the transaction or not by voting for the transaction or electing to sell their SPAC shares if the transaction is not something that they are interested in participating in.
• A SPAC has a limited life. If it does not enter into a transaction in a specified period of time, typically 18 to 24 months, it would be required to give the proceeds back to the original investors.
More this topic and more will be discussed at IncreMental Advantage's Alternative Exits Conference, December 12, 2006 in New York City. For more information visit www.incrementaladvantage.com/conferences or contact Neomi at 609-919-1895 x100 or neomi@incrementaladvantage.com.
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