Ferris Baker Watts Inc., one of the few remaining regional stock brokerages, has moved into a trendy and speculative investment banking line: taking "blank check" companies public.
Before May, Ferris Baker Watts had never underwritten such an offering. Since then, four blank-check companies, which are corporate shells that raise money in an initial public stock offering on a promise to later buy an operating company, have registered to go public with Ferris managing the deal. If all of them succeed, District-based Ferris stands to rake in about $27 million in fees.
In the past year, more than three dozen blank-check companies nationally have registered to go public, some seeking to raise as little as $30 million, others as much as $120 million. Of those that have succeeded in raising money in an IPO,the total raised has been $480 million since the beginning of 2004.
Before Ferris's entry into the market, the niche of managing IPOs for such companies was dominated by obscure and highly specialized investment banks like EarlyBirdCapital Inc., ThinkEquity Partners LLC and Granite Financial Group Inc. Ferris's entry indicates growing mainstream acceptance of the blank check, a form of company that languished during the 1990s after a number of high-profile scandals involving blank-check promoters in the 1980s.
Officials at Ferris Baker Watts, whose investment banking business is having a banner year even without the blank-check offerings, declined to comment because the offerings it is underwriting are still under review by the Securities and Exchange Commission. Richard Prins, who has been with Ferris since 1997, runs its investment banking department.
Ferris's investment banking business is an anomaly. Few regional brokerages like Ferris still exist, and those that survive typically lack robust investment banking departments. Ferris has been the manager of nine initial public stock offerings since 1998, mostly in the specialty finance, real estate and technology sectors. It has had a particularly fruitful relationship with David Gladstone, who runs several McLean-based publicly traded commercial finance funds that Ferris brought public.
But its sudden interest this summer in blank checks has some local dealmakers scratching their heads. Some wonder if Ferris is just jumping on a bandwagon or if this marks the emergence of a new specialty at the 105-year-old firm, which has 33 branches mostly in the mid-Atlantic region.
Blank-check companies are a kind of publicly traded buyout fund. Investors buy shares in a shell company, whose management promises to use the money to buy an operating business within 18 to 24 months. If management can't do a merger in the allotted time, it returns the IPO funds to shareholders -- minus, of course, the various investment banking and administrative fees it cost to create and operate the shell company. The initial offerings of such companies almost always includes stock warrants, the right to buy a stock at a pre-determined price. If the company can successfully buy and build a real operating business, the warrants can be extremely lucrative several years down the road.
The risks are easy to envision. First, if a blank check doesn't buy an operating company, IPO investors lose the investment banking fee and their investment funds are left fallow for as long as two years. Second, even if the blank check's management does buy an operating company, there's no guarantee it will be a successful company or a successful stock.
It's also easy to imagine a blank check's top executives siphoning investor money into their own pockets, which is why the SEC in the 1990s passed strict rules about how blank checks must be run. Blank checks are restricted to paying only direct expenses associated with identifying merger partners, plus no more than $7,500 a month to a management-affiliated company for administrative support. (That's still $90,000 a year.) Most of the IPO money is held in a trust until a merger with an operating company is approved by shareholders.
The surge in blank-check company stock offerings is fueled by the perception that private corporate buyout funds, which raise money from wealthy investors or institutions to buy private companies, have achieved excellent returns, said Derek M. Meisner, an attorney at Kirkpatrick & Lockhart Nicholson Graham LLP and a former SEC enforcement lawyer. The blank check provides an average investor a shot at such returns.
"Blank-check outfits try to find hidden gems, undervalued private companies," Meisner said of blank checks generally, while not expressing an opinion on Ferris's deals. "Investors see the lure of big potential profits, though the truth is the majority of times that doesn't pan out."
Here are the blank checks Ferris is trying to bring public, none of which has been completed:
* Cold Spring Capital Inc. of Connecticut is hoping to raise $120 million in a public offering. Chief executive Richard A. Stratton has a background in real estate finance.
* Harbor Acquisition Corp. of Boston is hoping to raise $60 million. Chief executive Robert J. Hanks is a private equity veteran, mostly in the venture capital world.
* JK Acquisition Corp. of Houston is trying to raise $60 million. It is run by James P. Wilson, who has run his own private equity firm since 1990.
* India Globalization Capital Inc. is a Bethesda company organized by telecommunications entrepreneur Ram Mukunda. India Globalization, in its SEC filings, said it plans to focus on acquiring companies in India. Ferris hopes to raise $120 million for the company. Ferris has a history with Mukunda, having taken his Startec Global Communications Corp. public in 1997.
Ferris has added an incentive to investors in some of its blank-check deals that's not offered by other investment banks bringing such companies public: Ferris is deferring a large chunk of its fee. In the case of India Globalization, Ferris is deferring $6.6 million of its $9 million fee until the India Globalization actually buys an operating company. It has offered similar deferments in the case of Cold Spring and JK Acquisition.
Such incentives may be an indication that investors are cooling to the idea -- only eight of the 36 blank checks in registration have managed to complete an IPO -- and perhaps that they don't want their money used to pad investment banking fees without some insurance that management is serious about buying a viable operating company.
But if Ferris can get its deals done, it may be an indication that blank-check companies are more than an investment fad.
E-mail Terence O'Hara's e-mail at email@example.com.