If someone asked you what the acronym SPAC stood for, you would probably give it some thought and then answer "uh, isn't it the abbreviation of special purpose and something?" and then go and look it up on Google. Your search would return a link to a page on Wikipedia dedicated to the subject. SPAC - short for Special Purpose Acquisition Company - has, in recent years, become the buzzword among investors, both private and institutional, in the US capital market, as have the accompanying phrases, shell company or blank check company. In most cases the company in question is one that is devoid of any business, having been founded just before its flotation, and which raises capital from investors for the sole purpose of acquiring the activity of a private company and making it a public one through a reverse merger.
Over the past three years, flotations by SPACs in the US have become a fairly common occurrence. Naturally, Israeli entrepreneurs have also claimed their share of the action, with the number of Israeli owned SPACs, or ones with an Israeli connection, increasing steadily. One such company is Pinpoint Advance Corporation (Bulletin Board:PPACU.OB), which raised $28.75 million in its IPO three weeks ago.
Like other SPACs, PinPoint's success lies in its management and company board. It chairman is former General Security Service director general and current Mizrahi Tefahot Bank (TASE:MZTF) chairman Jacob Perry, the man who led Cellcom Israel Ltd. (NYSE:CEL) during its early years and made it a market leader, as well as Lipman until its sale to US rival VeriFone Holdings Inc. (Nasdaq: PAY; TASE: PAY) last year. The company's CEO is Adiv Baruch formerly CEO at BOS Better Online Solutions Ltd. (Nasdaq: BOSC; TASE:BOSC), and VP business development at Ness Technologies Ltd. (Nasdaq: NSTC).
So how did PinPoint get its name? "Our goal is to hit the target in our selection of company to merge with," explains Baruch. "We're like a marksman who has to take careful aim in order to hit the target," adds Perry.
Perry and Baruch are good friends, something which is self-evident during the course of a joint interview with the two men. "Adiv and I have known each other for 12 years," says Perry. "Just after I retired from public service, Adiv - who was then at Ness Technologies - initiated the visit to Israel by the then US president Bill Clinton. He and former Ness CEO Raviv Zoller asked me to be one of the speakers at the presidential reception, a kind of warm-up act (he smiles), and that's how we met. Last September, Adiv approached me and proposed that I join him and three other acquaintances in setting up a SPAC. To be honest, that was the third time that they asked me to join."
Globes: And why did you say yes on this particular occasion?
Perry: "Several reasons. First, as I mentioned, I knew the SPAC's management team and they came across as being very professional. Joining a SPAC is still considered an adventure, especially in Israel, since it is an unconventional approach to raising capital. When marketing a SPAC, investors are being asked to invest in people, not technology or anything like that, so they need to feel that these are people that they can trust. If, as in PinPoint's case, the finance is being raised from investors in Israel, the parent country, the process is easier since investors are more familiar with the managers' names. However, if the money is being raised from investors in the US, where the attitude toward SPACs is more mature, company managers need to take into account that investors will conduct a thorough check into their backgrounds.
"Another reason for joining was the amount of money to be raised. In the other companies that I was asked to join, the target sum ranged from $80 million to $100 million, while at PinPoint, Adiv decided to raise $25 million.
Which is fairly low, especially in comparison with other Israeli SPACs.
"True, this a fairly modest amount, but for us and for the investors from whom we raised it from, it's a lot of money. Either way, when I asked Adiv about the amount he gave a me a very convincing answer - he told me that from a survey they conducted prior to the flotation, it emerged that a substantial number of companies which could be suited to PinPoint on both the Israeli and European markets, were ones with values ranging from $30 million to $50 million. To be honest, I think that this is a less arrogant strategy, that is to say, it does not focus on the amount as the ultimate goal. The advantage of a SPAC does not lie in the amount of capital raised, but in the speed and efficiency with which its management merges activity into the company."
Now you have to buckle down and start looking for a company to merge with.
"True, and we don't underestimate that task. It is by no means easy since we have to find a company whose shareholders will approve the merger. A good many SPACs find themselves stuck once they have to secure the shareholder's approval for this. I cannot predict the future, but if the number of inquiries we received last month continues, we'll find the right company fairly quickly."
Do you make most of the pitches, or do most of the candidates contact you?
"Both. You could say that we have been inundated with candidates from the moment the IPO was completed, so we need to make our screening process discrete and extremely thorough, since invariably, most entrepreneurs believe that their company is the most worthy of all."
Aside from turnover, what are your other criteria when choosing a company?
"First, the company must be one that has a product that sells, which makes money for it, and for which it has a backlog of orders. Second, the product must be one that we believe represents a breakthrough, principally in terms of technology. We stipulated in our IPO that we would not restrict ourselves to any particular sector, but given our experience, we will give priority to the technology sector. Having said this, if an entrepreneur comes to us and claims that the toilet paper that he has invented represents a breakthrough, we won't rule him out."
For Perry and Baruch the difference between PinPoint and other SPACs also lies in the personal philosophy on the SPAC itself. "A good many SPAC managers look at a reverse merger with another company as a purely financial move," notes Baruch. In our case, we see it as a platform for building a company, rather like a turnaround process, that is to say, helping the merged company to expand and grow globally too, within the framework of the SPAC."
Are you implying that you don't plan to step aside once you've merged a company with your SPAC, but will be actively involved in its management alongside its current entrepreneurs or managers?
Perry: "That's right. Aside from the capital we will inject into the company, one of the advantages we can offer is our input as people. That does not mean that we'll replace the company's management following the merger but we will be involved in its activity, either on an ongoing basis, or through appointments to the company board where we can contribute from our experience.
"Generally speaking - and I don't mean any disrespect to anyone - quite a few of the companies that we have singled out as potential candidates are aware that they suffer from management difficulties, whether in marketing, technology or finance. We can provide a solution to any one of these."
A survey conducted by investment house Maxim Group LLC, PinPoint's book runner for its IPO, reveals that in 2004 100 SPACs were floated in the US, of which 24 carried out a merger, five gave investors back their investment and disbanded after failing to find a suitable match, 21 announced mergers that are still awaiting approval, and the remaining 50 have made no merger announcements at all to date.
Are you not apprehensive about the long and complex process that usually takes place in a reverse merger with a SPAC, or alternatively, the risk that you could eventually end up in the statistics of SPACs that didn't carry out a merger and gave investors back their money?
Baruch: "No, it doesn't worry us and we're confident that we have the ability to deliver results."
Perry: "It is true that the moment we propose a merger candidate to investors the focus will no longer be on us as it was in the road show prior to the IPO, but on the candidate company, a situation that is more complex. That said, we were perfectly aware of what we were getting ourselves into when we started this, and I believe that we are capable of doing the job properly."
Published by Globes [online], Israel business news - www.globes.co.il - on May 24, 2007
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