May 29, 2008

Goldman Sach Cancels a Deal: SPACs in Limbo?

With Goldman Sachs canceling its much-anticipated SPACs offering – through Liberty Lane – it looks like the bloom may be off the SPACs, rose (see this WSJ article from yesterday). Today’s WSJ has an article which offers this analysis:

The failure of Goldman Sachs Group Inc.’s first SPAC offering this week has sparked a debate over what brought the deal down and whether any structural changes within the industry could revive this segment of the IPO market.

Expectations for a successful offering had been raised the moment Liberty Lane Acquisition Corp. filed its initial public offering prospectus with the Securities and Exchange Commission in March. As a special purpose acquisition company, or SPAC, Liberty Lane’s offering followed a familiar format: The company began life as an empty shell and planned to raise money through an IPO to finance the acquisition of an operating business within two years, or investors would get their money back.

But alterations to the traditional SPAC structure made this deal a departure from the norm — one that Goldman hoped would draw in a stable base of investors and make potential acquisition targets more amenable to a takeover.

Instead, after two weeks of trying to price, Liberty Lane threw in the towel Wednesday, saying it had decided not to go ahead with the IPO for now. (See related Breakingviews commentary.)

‘State of the Market’
“My personal view is it was probably more the state of the market than the structure of the deal” that stymied Liberty Lane’s launch, said Michael Littenberg, an attorney who works on SPACs for Schulte Roth & Zabel LLP. “This has not been one of the most robust periods for capital markets.”

After a banner year in 2007, in which nearly a quarter of all completed IPOs in the U.S. were SPACs, the demand for these deals in 2008 withered along with the broader IPO market.

Others say Liberty Lane’s altered structure wasn’t appealing enough to investors. The changes Goldman made were aimed at reducing the dilution that SPAC investors and acquisition targets face due to the large amount of stock normally held by most SPAC management teams. But at the same time, it cut the stake that management took in the company, reduced the percentage of investors’ money kept in trust, and trimmed the amount of stock warrants available to investors.

“Obviously, we all know that SPACs in general have not been doing well, but they have had dips before,” says Kristin Angelino, an attorney who represents SPAC issuers and underwriters at Gersten Savage LLP. “If Goldman’s IPO didn’t have such a weak structure, I might say that this reflects a worsening of the market for SPACs.”

Through the new structure, Goldman was intent on placing Liberty Lane’s shares with “fundamental” investors, such as mutual funds, rather than marketing the deal to the typical SPAC buyers, which are hedge funds. Hedge funds in the past have gravitated to SPACs because the deals are sold as a stock-and-warrant unit that eventually splits, with some funds selling off the warrant portion and others purchasing only the warrants, depending on their investment strategies.

Underwriters and SPAC management have long wanted to shift ownership of the deals toward fundamental buyers who would stick with the SPAC throughout its lifespan and be more likely to approve an acquisition than hedge funds, which sometimes vote a deal down as part of their investment strategy. But fundamental buyers didn’t line up as expected.

Citi’s Alternative
Coincidentally, as Goldman’s deal was floundering last week, Citigroup Inc. filed an amendment to a SPAC it is underwriting that alters the structure in a different manner than Liberty Lane.

The Citigroup deal, HCM Acquisition Co., splits each IPO unit into two parts: One that contains 80% of a share of stock, another that contains 20% of a share of stock and a warrant that is nondetachable until the day after a business combination is approved. If a deal is voted down, the warrants expire worthless.

By binding the warrant to a portion of stock until an acquisition is completed, HCM is effectively giving warrant holders the ability and incentive to approve a deal. To give HCM a further edge in closing a deal, the company will still go ahead with an acquisition even if up to 40% of the shareholders vote it down – a higher bar than the typical 20% no-vote norm in the SPAC world.

How Companies Can Foil Their Activist Shareholders

I drafted this a while back but forgot to post it – more Tulane Institute notes from the WSJ’s Deal Journal:

The promisingly named “Barbarians at the Ballot-Box” panel here at the Tulane University Corporate Law Institute didn’t disappoint: it was full of good stories and disagreement among the panel members, who included Mackenzie Partners CEO Daniel Burch, PR maven Joele Frank, Roy Katzovicz, general counsel at the hedge fund Pershing Square, and Institutional Shareholders Services executive Chris Young.

The panelists don’t exactly come to blows. Still, it is clear Katzovicz and Young will have to take a lot of heat for the frustrations of people who have problems with activist investors. Katzovizc says hedge funds would rather not wage proxy fights and fight for board seats– they would rather focus solely on profitable investing.

Then quickly the panel seems to shift in to “Dear Abby” mode, advising on how to fight off shareholder activists. Here is a look at some of their advice.

Staggered Boards Don’t Work: It turns out that some of the things that companies think protect them from attacks by activists don’t work. Katzovicz, for instance, disputes that staggered boards–where directors are elected in different years, rather than all at once–help fend off activists. Instead, he says, they make his job much easier.

Don’t Be Snotty to Your Activist: Frank warned people to pick up the phone very carefully when they see calls from the (203) area code in Greenwich, in hedge-fund heavy Connecticut, because whatever you say to an activist can and will be used against you in a 13D filing to the SEC. The panelists discuss the sad cautionary tale of Embarcadero Technologies, whose chief financial officer once said to activist Robert Chapman, “F*** You!” That gave Chapman a chance to get justifiably huffy that it was “inappropriate and inadvisable” to use such “blasphemy” to a shareholder who owns 9.3% of your company. We quibble with Chapman’s choice of words — a blasphemy is only when you are insulting a deity –but the point is a good one. Young, of ISS, recounts what he considers a horror story of an unresponsive company: one which wouldn’t even meet with T. Rowe Price. “This isn’t an activist! It’s T. Rowe Price!” he said with wonder.

Do Lots of Hand-Holding: Frank advocated keeping good relationships with the media and guiding CEOs through the process. “Most CEOs aren’t used to opposition,” Frank says. She also advocated a quick response to activists: call them early and often. This can apparently diffuse the activist. Katzovicz recalled a story in which Carl Icahn was on the brink of going on the attack at a company he had invested in. He met with the firm’s executives, who told him, “Carl, whatever it is you want, we’ll do it.” Icahn sold all of shares and left the company alone. Kim Rucker talks about the “headline pressure” as executives face the dread of seeing themselves in the paper every morning. That, and exhaustion, can take a toll on management’s decision making, she and Frank agreed.

Accept that You Can’t Control Your Proxy Firm: Frank, who does a lot of hostile defense work, launched this attack toward the end of the panel: “I believe ISS has never seen a slate it doesn’t like from activists. Frank asked with some annoyance if ISS ever goes against an activist slate in toto. Young said the proxy firm does, about 30% of the time. The question to ask, he suggested, isn’t what ISS approves but why activists are getting traction with shareholders. He noted that a few years ago, the directors suggested by hedge funds were the hedge-fund manager and four of his fraternity brothers who worked for him. The activists have wised up since then and suggested better directors, he said. Rather than saying that ISS tends to approve the majority of hedge fund director suggestions, he instead pointed out that ISS discards some of the activists’ suggestions.

Don’t Get too Comfortable: Burch noted that long-term investors won’t necessarily support what you do against activists. Rucker said that if boards and companies are doing the right things and doing their jobs, they can survive all that.