The Latest – but Not Greatest – Thing: SPACs

What would you think of forming a company to buy those private firms that that have already been looked over and rejected by the best VCs, LBO firms, private capital groups, investment banks or anyone else with 150 million or so to spend? 

Probably not a whole lot.

Yet that’s essentially the entire idea behind one of the hottest new brokerage products out there: SPACs.

The
NYT
has a brutal take takedown on them:

WOULD you hand over wads of cash to a money manager you didn’t know, to invest in a company he hadn’t yet discovered, and would you then also pay a boutique investment bank you had never heard of as much as 10 percent to get in on that deal?

If the answer is yes, then join the latest alternative investment craze: special purpose acquisition companies, or SPAC’s.

They are essentially blank-check companies that allow their managers to raise money from the public to later invest in another company – although issuers do not disclose the target because to do so would mandate onerous disclosure requirements. Think of a SPAC (rhymes with smack) as a publicly traded buyout company.

My own theory on why these are suddenly so popular on the Street is straight-forward: They are easy to sell, they hit all the right buzz words, and they have very high fee structures.

Here’s more from the NYT:

Here’s how it works: A couple of investors want to buy companies in China, but they need $30 million to pay for the companies. They hire a firm like EarlyBird Capital, an investment bank in Melville, N.Y., which has been busy raising money from the public for the management teams of SPAC’s.

These companies are typically priced at $6 a unit, which generally includes one share of common stock and two warrants with an exercise price around $5. If all goes well, the offering generates about $30 million to the managers who are then entrusted, for 12 to 18 months, to find a company to buy.

The underwriting bank collects an enormous fee – as much as 10 percent for the offering, more than the standard 7 percent for an initial public offering. The SPAC then puts 80 percent to 90 percent of the money in a trust, sets aside a minimal amount of funds – usually less than $1 million – and tries to find a company.

If they find one, and all the shareholders approve the deal, the management gets 20 percent of any profits eventually generated. The shareholders get ownership of a company that they may or may not want to own. If they don’t, they can sell their shares.

If in 18 months the managers have not yet found a company, they give back the money, minus the fees and expenses.

So let me se if I understand this idea: I give you my money to invest in sometihng which has a very low probability of success. The most likely apparent outcome occurs, and I get my money back minus 10%? Gee, where do I sign?   

Go read the entire column . . .

Source:
Crave Huge Risk? This Investment May Be for You
Jenny Anderson
NYT, September 23, 2005
http://www.nytimes.com/2005/09/23/business/23insider.html

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Compare & Contrast: FEMA vs Wal-MART

There are certain things I expect for my tax dollars:  Schools, Police services, Military protection, Infrastructure, etc.

This is true whether you believe in big government or small. Note that these are not politically charged issues — should the EPA be eliminated, why not privatize NASA, etc.

I am referring to the very basic services government is formed to provide.

Which is why the simply incompetant job performed by FEMA is such a cause for concern: Somehow, we seemed to have lost interest in strategic planning — there is no intelligent design (pun intended) in anything the goverment does lately.

Even more pathetic than the failure at the Federal level is the post-disaster excuse making. Echoing similar 9/11 excuses, the "No one could have seen this coming crowd" is out pushing the same canard.

Let’s put that lie to rest right here, via the WSJ:

The Federal Emergency Management Agency could learn some things from Wal-Mart Stores Inc.

On Wednesday, Aug. 24, when Katrina was reclassified to a storm from a tropical depression, Jason Jackson, the retailer’s director of business continuity, started camping out in Wal-Mart’s emergency command center. By Friday, when the hurricane touched down in Florida, he had been joined by 50 Wal-Mart managers and support personnel, ranging from trucking experts to loss-prevention specialists.

On Sunday, before the storm made landfall on the Gulf Coast, Mr. Jackson ordered Wal-Mart warehouses to deliver a variety of emergency supplies, from generators to dry ice to bottled water, to designated staging areas so that company stores would be able to reopen quickly if disaster struck.

Then, when the hurricane knocked out Wal-Mart’s computerized system for automatically updating store inventory levels in the area, he fielded phone calls from stores about what they needed. He also alerted a replenishment team to reorder essential products, such as mops and bleach. And by Tuesday, scores of Wal-Mart trucks, some escorted by police, were setting out to deliver 40 generators and tons of dry ice to company stores across the Gulf that had lost power.

Katrina is the biggest natural disaster Wal-Mart has ever had to confront. Initially, 126 of its stores, including 12 in the New Orleans metropolitan area, and two distribution centers were shuttered because they were in Katrina’s direct path. More than half ended up losing power, some were flooded and 89 have reported damage.

But by this past Friday, all but 15 of the idled stores had reopened. From Boutte, La., to Pass Christian, Miss., Wal-Mart frequently beat FEMA by days in getting trucks filled with emergency supplies to relief workers and citizens whose lives were upended by the storm.

Wal-Mart’s speed in responding to Katrina underscores the extent to which it and other big-box retailers like Home Depot Inc. have become key players in responding to natural disasters. Whereas FEMA has to scramble for resources, Bentonville, Ark.-based Wal-Mart has it owns trucks, distribution centers and dozens of stores in most areas of the country. It also has a specific protocol for responding to disasters, and it can activate an emergency command center to coordinate an immediate response. In the short term at least, the hurricane has helped boost Wal-Mart’s tattered image, damaged by a major sex-discrimination suit and allegations that it provides workers stingy pay and benefits.

Its astonishing that some people keep pressing the same old misinformation into service . . .

Source:
At Wal-Mart, Emergency Plan Has Big Payoff
Ann Zimmerman and Valerie Bauerlein
THE WALL STREET JOURNAL, September 12, 2005; Page B1
http://online.wsj.com/article/0,,SB112648681539237605,00.html

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Category: Economy, Finance, Politics