For blank-check IPOs, popularity comes at a price

By Jonathan Keehner

NEW YORK (Reuters) - Blank-check companies have been some of the hottest initial public offerings in recent months, but hedge funds with an eye for profit may be short-circuiting them, a trend that could end up stunting the IPO market.

Blank-check companies, or special purpose acquisition companies (SPACs), which use proceeds from share sales to fund future acquisitions, can work well. Retailer American Apparel Inc was acquired last year by one.

SPACs raised nearly four times more in 2007 than in the year before, bolstered by a credit crunch that sidelined competitors like private equity firms that rely on debt to make acquisitions.

But SPACs, which sold more than $12 billion of shares last year, have run afoul of investors like hedge funds -- who can demand that the companies return cash if they don't like a potential acquisition.

"Some of the difficulty for SPACs in completing acquisitions is the entrance of what might be described as activist investors," said Brett Goetschius, publisher of DealFlow Media, which collects data and has a newsletter on SPACs. "Investors can essentially 'greenmail' the SPAC management to buy out their shares in order to get acquisition approval."

SPACs float shares with the intention of funding acquisitions -- which must be approved by a certain percentage of shareholders, whose money may otherwise be returned at a possible expense to the SPAC sponsors or underwriters.

Investors such as hedge funds have recently pushed against acquisitions, with the number of shareholders favoring a transaction falling short of the level required for approval. That means the SPAC may have to liquidate and return investor funds -- potentially giving naysaying shareholders leverage over sponsors that could otherwise bear some of that cost.

"SPACs have had increasing challenges with their shareholder votes in the last year," said Thomas Ivey, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, who works on the offerings.