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June 18, 2008

SPACs Go Mainstream

By James Ramage and Peter Chapman

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A boom for bankers is a bust for traders. They represent more than a third of all initial public offerings so far this year. They accounted for about a quarter of all IPOs last year. But unlike most new listings, they have not done much for trading desks.

SPACs, or special purpose acquisition companies, are corporate shells brought public for the express purpose of acquiring a going concern. They have been around for years, but mostly as micro-cap oddities trading in the over-the-counter market.

Their profile began to change in the last few years, though, after the American Stock Exchange began listing the securities and major bulge bracket firms began underwriting them. Now even the New York Stock Exchange and Nasdaq OMX want in. In March, the two exchanges submitted requests to the Securities and Exchange Commission to list SPACs, following in the steps of the Amex, which listed its first SPAC roughly three years ago.

Suddenly securities issued as units have become respectable. Citi, Deutsche Bank, Lehman Brothers, Banc of America Securities and other majors joined such pioneering boutiques as Morgan Joseph, Legend Merchant Group and EarlyBirdCapital in bringing $21.4 billion of SPACs public from 2004 through April.

Market Woes

The market is stalled at present. But around the start of the year, deals approached, and one even reached, the $1 billion level. And while that has meant big fees for investment banking departments, it hasn't translated into an equivalent bonanza for trading desks.

Granted, the SPAC explosion has brought new desks into the secondary market over the past several years, such as Citi, CRT Capital, Jefferies & Co. and Cantor Fitzgerald, but volume is sparse.

"This is definitely an instrument that's a lot more news- and event-driven than others," says Stephen Dolan, senior vice president on the trading desk at Jefferies. "The IPO ends up being a big day for the name. And obviously around any announcement of a deal will be an active day."

A review by Traders Magazine compared the average daily volumes of some of the largest SPACs to those of operating companies with similar capitalizations.

On average, only three-tenths of a percent of the SPACs' float traded each day. That compares with between 1 and 4 percent for the operating companies.

As an example, one of the largest SPACs, Liberty Acquisition Holdings Corp., has a public float of about 129 million shares. The average daily volume of its common was only about 120,000 shares in a recent three-month period.

Most of the operating companies were trading at least a million shares per day in the same period.

The average daily volume numbers for SPACs are deceptive, though. On certain days and during certain periods, the securities-units, common or warrants-may trade in the millions.

The Nature of SPACs

And that's the nature of SPACs. They trade heavy mostly at certain points in the security's finite life.

SPACs come public as units. Shortly thereafter, they can be broken into their component parts-typically one common share and one warrant-and traded separately.

There is heavy trading in the units during the week of the IPO. Then there is often heavy trading in the common and the warrants once they are permitted to trade separately.

Then nothing much happens until a potential acquisition is announced. And that's the way some traders like it.