Blank-check IPOs to shrink

NEW YORK (Reuters) - The number of blank-check "SPAC" companies coming to market is set to fall this year -- but they're getting larger and harder to vote down.

A special purpose acquisition company (SPACs) is a shell organization that raises money in an initial public offering to acquire another business. That business then becomes publicly traded through the SPAC's shell company, after shareholders approve the deal.

While blank-check offerings have been around for years, the popularity of the variety called the SPAC has recently surged, with shareholders liking the controls built into the structure -- the ability to approve an acquisition and a money-back guarantee should a deal not be reached within a specific time.

SPACs are also benefiting from the added clout that big names such as activist investor Nelson Peltz and Texas sports tycoon Tom Hicks have lent since launching their own.

Still, the number of SPAC IPOs is expected to fall by 10 percent this year, according to research from Palo Alto-based research firm SPAC Research Partners, with the credit crunch making it harder to raise money and investors getting more discerning about which SPACs to back.

"It's like swimming against the current to begin with," said SPAC Research Partners analyst and co-founder Michael Tew. "In addition to that, investors have really wised up to SPAC deals. Many haven't done as well as they've been sold to investors -- so there's a flight to quality."

His research shows that more than 90 registration statements have been filed by SPACs this year but only 12 have gone public.

"The whole IPO market will be down significantly this year," said Barry Grossman, attorney at New York-based law firm Ellenoff Grossman & Schole LLP, who has been involved in a number of public offerings of SPACs. "There are a lot of SPACs in the pipeline right now and there's so much inventory out there that I can see people saying: 'I have enough SPACS in my portfolio right now; let me look around.' But if you have quality management, those deals are still getting done."

Tew thinks the market will bounce back in 2009, partly due to enthusiasm from investment banks to underwrite SPACs.

Francis Gaskins, president of research firm IPOdesktop.com, says in the context of a poor IPO market, a 10 percent reduction in 2008 would still mean that SPACs would do very well.

While the number going public may decrease, SPACs are getting bigger, with the average size expected to increase 45 percent from last year to $265 million, SPAC Research Partners said.

According to Tew's research, 25 percent of all SPACs in 2008 should get voted down.

"The SPACs that are coming up to be voted on now are very different to those being sold right now," said Grossman.

The threshold of votes needed to block a SPAC acquisition has been rising from about 20 percent to 40 percent, he noted.

New SPACs also have an increased ability to effectively buy "no" votes from shareholders planning to oppose a deal, he said, thus allowing the SPAC greater power to get an acquisition through. Another trend is to limit the amount of money shareholders can receive back should they vote "no."

"It takes the power away from the hedge funds who have just been going in to vote 'no,'" Grossman said. "What's happened is people have realized the game and reacted to the game."

Gaskins makes the point that SPACs can be an attractive option for a company looking to sell or grow. With tougher credit conditions, smaller companies have limited options to raise money or find a buyer.

(Additional reporting by Jessica Hall in Philadelphia and Lilla Zuill in New York, editing by Gerald E. McCormick)