Deals May Strain On Refco News;

"Blank-check" companies defy weak IPO market

Fri Sep 1, 2006 4:28pm ET

By Yung Kim

NEW YORK, Sept 1 (Reuters) - Even while the number of U.S. initial public share offerings has dried up, more and more "blank-check" companies are raising equity before they have acquired any assets.

The trend runs counter to a broader intolerance for risk among potential IPO investors that emerged in May, along with concerns about potential Federal Reserve interest rate hikes, inflation and record-high oil prices.

Amid the weak IPO market and tough federal regulations for public offerings, "special purpose acquisition companies" have become an attractive way to raise capital and hire experienced managers, said Francis Gaskins, an independent IPO analyst and president of IPO Desktop.

These blank-check companies are set up with a management team in place, but few if any assets.

"The bar for IPO companies has been raised and the market for smaller companies to go public is not great," Gaskins said. "There are middle-tier companies that are qualified to go public, but they don't want to go through the hassle on their own."

While 44 companies have withdrawn or postponed offerings this year worth about $10 billion, 31 blank-check companies have raised almost $2.4 billion through IPOs.

In all of 2005, 29 blank check companies debuted shares worth about $2 billion, while in 2004, there were only 13 such offerings that raised $451.4 million.

CHANGING PERCEPTION

For most of their history, blank-check companies were viewed by investors with a suspicious eye.

But they have worked to upgrade their image through better marketing, hiring management teams with greater name recognition and working with higher-profile underwriters, said David Menlow, president of IPOfinancial.com.

"Evidently, (blank-check companies) are no longer relegated to a world of unknown underwriters," Menlow said, though he added they still carry unique risks because they can end up buying assets of questionable quality.

"People have to understand that private equity firms invest in a lot of dogs," Menlow said. "Without diversification in their asset base, they wouldn't have great results."

Under U.S. Securities and Exchange Commission regulations, blank-check companies have 18 months to identify a takeover target, with six months more to close the deal, and they need consent from 80 percent of their investors to make an acquisition.

If unable to complete a deal, the companies must return the money raised -- minus fees and expenses, which can range from 8 percent to 15 percent of the total.

Of 13 blank-check IPOs in 2004, 12 acquired or merged with other companies, while China Mineral Acquisition Corp. is in the process of returning funds after a failed acquisition attempt, according to documents filed with the SEC.

Services Acquisition Corp. International (SVI.A: Quote, Profile, Research), which floated shares in 2005 at $8.00, announced in March it would merge with U.S. restaurant chain Jamba Juice in a deal worth about $265 million. Its shares were trading on Friday on the American Stock Exchange at $8.86.

In March, Acquicor Technology Inc. (AQR.A: Quote, Profile, Research) raised $150 million and generated buzz with a management team led by former Apple Computer Inc. (AAPL.O: Quote, Profile, Research) executives Gil Amelio, who was briefly Apple CEO in the mid-1990s, and Steve Wozniak, Apple's co-founder. The company has not yet announced an acquisition.

EDUCATION IN FOCUS

After a two-week lull in the market, New Oriental Education & Technology Group Inc. is scheduled to be the first IPO of the autumn on Wednesday.

"We haven't had one in a while, and this one has got a sizzle behind," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald in Los Angeles.

The private education company based in China is poised to sell up to 7.5 million American depositary shares (ADS) for between $11 and $13 per each, raising $90 million if priced at the midpoint. One ADS is equal to four common shares.

Offering services and products primarily for English and other language training, the company earns two-thirds of its revenue from four cities in China, each with a population of more than 4 million, according to an SEC filing.

The company has applied for a New York Stock Exchange listing under the symbol "EDU" (EDU.N: Quote, Profile, Research).