Blank-check firms, hot IPO fad, contain pitfalls for investors

More than half of public SPACs in 2015 and 2016 are trading below their offering price

Blank-check companies are enjoying their highest popularity in more than a decade, raising more than $10 billion in new listings last year.

But investors should still be cautious about the structure, according to a review of the companies’ performance by The Wall Street Journal.

Such firms—often called special-purpose acquisition companies, or SPACs—hold initial public offerings to raise cash for acquisitions. They don’t have assets or any operating history. They are largely bets on their executives, who seek to do a deal within a specified time period, typically two years.

Of the blank-check companies that went public in 2015 and 2016, more than half are now trading below their IPO price, the Journal’s analysis shows.

It is an industry convention for SPACs to go public at $10, and in most cases their shares convert into shares of the target company on a one-to-one basis. So a share price above or below $10 can indicate whether or not the SPAC executed a successful deal.

Thirty-three SPACs held IPOs in 2015 and 2016. Of these, 27 did deals and transformed into oil drillers, trucking companies or other real-world businesses. Eighteen now trade below $10, based on Monday’s closing prices and accounting for any unusual stock-conversion factors, in which the SPAC shares didn’t just convert directly into shares of the target companies.

Another nine did deals and are now trading at $10 or higher. The remaining six either haven’t closed a deal yet, or dissolved without doing a deal and returned money to shareholders. Those that dissolved were delisted by their stock exchange.

“I’ve been surprised by the staying power of SPACs, given that they haven’t been producing big returns for investors,” said University of Florida finance professor Jay Ritter, who studies IPOs.

From 2010 to 2017, SPACs underperformed the broader market by about 3% annually in the first three years after their IPO, according to Mr. Ritter’s analysis of 92 blank-check listings in that period. Mr. Ritter attributed that underperformance to the fact that these SPACs, before doing their deals, parked their cash in escrow accounts returning low interest rates at a time when the market was rising.

There are SPAC successes: Conyers Park Acquisition Corp., which went public in 2016, merged with the maker of Atkins protein bars the next year and became the Simply Good Foods Co., whose stock is up 45% over the past year. It closed on Monday at $19.84.

Then there are stories like that of Quinpario Acquisition Corp. 2. It raised $350 million in the first blank-check IPO of 2015, with underwriters including Deutsche Bank AG.

Led by Jeffry Quinn, a veteran mining and chemicals executive, it initially aimed to make acquisitions in the “specialty chemicals and performance materials industries,” according to a 2014 regulatory filing. Instead, in 2017 it acquired two information-technology companies and became Exela Technologies Inc. Shares of Exela tumbled immediately after the deal, and closed Monday at $3.90.

Aspokeswoman for Mr. Quinn said he was traveling and unavailable for an interview. Exela declined to comment.

Some SPAC experts say it is unfair to judge blank-check companies by how their shares perform after a deal. The reason: SPACs have a built-in safeguard that allows investors to redeem their shares before an acquisition goes through. That means investors who buy during the IPO, which are often hedge funds or other sophisticated players, can avoid getting hurt by bad deals.

“If SPAC common shareholders don’t like the deal a sponsor presents, the overwhelming majority of them will happily take their $10 cash in trust back, plus interest, rather than stick around and hold on to shares in the acquisition target,” said Benjamin Kwasnick, founder of data provider SPAC Research. Mr. Kwasnick owns shares of some SPACs as an individual investor.

In the 1980s, blank-check companies were often associated with penny-stock frauds. Laws and regulations implemented in the next decade helped clean up the sector, setting the stage for a surge of SPAC listings in the frothy years before the 2008 financial crisis.

Since 2010 they have enjoyed another resurgence, as well as increased acceptance on Wall Street.

The volume of blank-check IPOs grew more than 650% in the five years through 2018, which was the biggest year for SPAC issuance since 2007, according to Dealogic.

Goldman Sachs Group Inc. underwrote its first SPAC IPO in 2016. The New York Stock Exchange welcomed its first blank-check company to the Big Board the next year, after loosening its listing rules for SPACs. Nasdaq Inc. has listed them since 2008.

Wilbur Ross, the billionaire investor turned Commerce Secretary, and entertainment entrepreneur Haim Saban, creator of the Mighty Morphin Power Rangers, are among the executives who have launched SPACs to seek acquisitions in recent years.

SPACs have a built-in safeguard that allows investors to redeem their shares before an acquisition goes through