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Monday, June 11, 2007

Endeavor and the Troubling Pursuits of SPACs

Today's DealBook has a funny/interesting post about the special purpose acquisition company (SPAC) Endeavor Acquisition, which has agreed to buy American Apparel for $385 million.  Endeavor today filed the preliminary proxy for the deal and in the history of the transaction, Endeavor details its fruitless attempts to buy almost any other company.  According to the preliminary proxy, Endeavor looked at the following entities before agreeing to acquire American Apparel (Endeavor presumably omitted the names to protect the innocent and as required by confidentiality agreements):

1.  A branded restaurant chain with franchising operations that was headquartered in Los Angeles, California and owned by a private equity firm.

2. A well-known national chain of weight loss centers headquartered in California also owned by a private equity firm.

3. A restaurant chain headquartered in California that had strong regional brand recognition on the West Coast.

4. A regional ethanol producer headquartered in the Midwestern United States 

Endeavors first three buy-out attempts were trumped by other buyers; it withdrew from bidding on the fourth potential acquisition over price.  Then, according to the proxy, things got better:    

In July 2006, Mr. Ledecky [CEO of Endeavor] met with Endeavor consultant Mr. Martin Dolfi to discuss deal flow. He discussed with Mr. Dolfi the philosophy espoused by Mr. Peter Lynch to “invest in what you know.” Mr. Ledecky then asked for examples of products that Mr. Dolfi used and enjoyed. Mr. Dolfi indicated that he enjoyed the clothing sold at American Apparel. As a way to reinforce the discussion, Mr. Ledecky instructed Mr. Dolfi to research the American Apparel company. Mr. Dolfi returned in August 2006 with a research book presentation on American Apparel.

And the rest is history. 

SPACs have been on the rise of late as the public shareholder's substitute for private equity.  But they are a poor one.  As I've written before:

The rise of SPACs has been a discussion point and concern among M&A practitioners for almost three years now . . . .  SPACs were big in the 1970s but fell into disfavor due to a number of high-profile implosions and complaints over the quality of their acquisitions.  But like Frankenstein arisen from the dead, the Times reports that SPACs represented 26 percent of the 73 initial public offerings this year, and 15 percent of the money raised.

The rise of SPACs is a derivative effect of the private equity bubble.  The Investment Company Act of 1940 effectively makes impossible the public listing of a private equity fund.  And Investors shut off from private equity are turning to SPACs as a substitute.  Given the past troubles with SPACs this is a dubious effect at best.  There is also no real reason to permit SPACs yet shut-off private equity funds from the public markets.  It is yet another reason why the SEC should take steps to fully revise the Investment Company Act to bring it into the modern era.   

Today's filing by Endeavor supports my previous thoughts.

http://lawprofessors.typepad.com/mergers/2007/06/endeavor_and_th.html

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