Ledecky's Blank Check Is No Blank Slate

By Steven Pearlstein
Friday, February 17, 2006

When we last left Jon Ledecky amidst the rubble of the 1990s stock market boom, most of the companies he'd launched or helped to take public had crashed and burned. It had been a wild ride for both Ledecky and his investors.

Those who had the foresight to get in and out early -- including Ledecky himself, to the tune of $60 million -- made small fortunes with "roll-ups" such as U.S. Office Products, U.S.A. Floral Products and Building One Services.

Those who got in late, or hung on too long -- usually after Ledecky had given up his post as manager or director -- suffered spectacular losses. Ledecky was sometimes in that group, too, watching many millions of dollars in paper profits evaporate.

In the end, the rap on Ledecky was that he was much more talented as a dealmaker, networker and self-promoter than he was at actually running businesses.

After the crash, Ledecky went through a period of reflection and self-transformation, he told me this week. He gave away close to $10 million, most of it toward education of inner-city kids in Washington. He took up Bible study and tried to make peace with some of the people he may have used or misled. He sold his interest in the Capitals, Wizards and Mystics.

But by last year, Ledecky was ready for a relaunch. With the financial backing of George Soros and the political backing of Marion Barry, he embarked on a quixotic quest to be chosen owner of the new Washington Nationals. Then, in December, with a New Zealand financier named Eric Watson, he quietly raised $120 million in an IPO for a company with no revenue, no employees and no assets -- nothing except a promise to try to buy a private company somewhere in the service sector within 18 months.

Officially, companies such as Ledecky's are called special purpose acquisition companies, or SPACs. More commonly, they are known as "blank-check companies," pools of investor money raised for the sole purpose of buying private companies -- in effect, taking them public without having to go through the scrutiny and regulatory hassle of an IPO.

Once the province of shady penny-stock promoters and boutique investment banks, SPACs have recently become among the hottest products peddled on Wall Street by some of the bluest of the blue-chip firms. Last year, they were used to raise more than $2 billion in funds, accounting for 20 percent of IPOs. An additional $3 billion in SPAC offerings is now reported to be in the pipeline, with promoters such as Apple Computer co-founder Steve Wozniak and counterterrorism guru Richard Clarke.

It is not hard to understand why Wall Street has gone gaga over SPACs. Aside from the usual 7 percent underwriting fees, they give Wall Street a chance to compete with private equity funds in the buyout arena while offering an outlet for all that cash sitting in hedge funds. And SPAC promoters can profit handsomely, as well.

In the case of Endeavor Acquisition, for example, Ledecky and Watson put down only $25,000 but control 20 percent of the stock. If an acquisition is made and various financial transactions associated with it play out as expected, the pair could wind up with 10 percent of a company with a market value of $120 million. That would work out to a "finder's fee" of $6 million apiece.

Like other SPACs, Endeavor Acquisition is not for the ordinary investor. It is a complex deal involving not just ordinary shares, but also warrants and open bids, dilution and escrow accounts that are best left to Wall Street's sharks and sharpies.

What's harder to understand is why so many of these investors were clamoring to follow Ledecky and Watson down the financial equivalent of a blind alley (according to the investment bankers at Ladenburg Thalmann Financial Services, the IPO was substantially oversubscribed). Several of Ledecky's previous ventures were variations on blank-check companies. And Watson's history includes a settlement with the Securities and Exchange Commission about trading on inside information and two adverse court judgments in cases brought by former employees and business partners in New Zealand.

Perhaps to allay such concerns, Ledecky and Watson agreed to put $15 million in escrow to effectively guarantee investors almost all of their money back, under a complicated arrangement, if any of them don't like the acquisition that has been proposed, or if no acquisition target is found.

That still begs the question, however, of why anyone would buy into any SPAC before he knows the company and industry he is buying into. For these early investors to make money, there has to be a substantial premium to be earned for taking a company from private to public ownership -- one big enough to pay the investment bankers and the promoters and still have something left over. Or there have to be company owners stupid enough to sell their firms for substantially less than they are worth. With the amount of private equity money out there bidding up the price of everything in sight, neither prospect looks very likely. Perhaps that explains why so many recent SPACs have folded without making an acquisition.

Given Ledecky's dramatic rise and fall as one of the area's most celebrated entrepreneurs, you've got to give him credit for staying in the game and trying to reinvent himself. Unfortunately, this looks a lot more like repackaging than reinvention.

Steven Pearlstein can be reached atpearlsteins@washpost.com.

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