GLG deal further undermines blank checks

May 17, 2010

Hedge fund group GLG Partners  got its New York stock market listing when Freedom Acquisition Holdings, a blank check company, bought a stake back in mid-2007. Then, Freedom’s stock traded at $10-plus. Now, UK-listed Man Group is buying GLG for $4.50 a share. Sure, Freedom’s initial owners got a pop — but longer term it’s another bounced blank check.

Special purpose acquisition companies, or SPACs, were all the rage in the liquidity-flush world that ended in 2008. The idea, akin to the one that spawned the doomed South Sea Company in the 18th century, was to float a shell company and raise capital from investors to make some sort of acquisition in the future — usually with few constraints.

That’s how GLG came to market, bypassing the extra complexities of an initial public offering of its own in a deal with Freedom that valued the hedge fund firm at some $3.4 billion. Now, even in a logical-looking deal that accords GLG a roughly 50 percent premium to the closing price of its stock on Friday, Man is set to buy GLG for around $1.6 billion. For any shareholders still around from the launch of Freedom-turned-GLG, that’s a disappointment.

And Freedom’s investment in GLG looked like one of the better ones. The SPAC’s investors — typically hedge funds looking for a short term gain — got just that, with GLG’s stock topping out north of $14 later in 2007. In many other cases, SPACs that “succeeded” in finding things to buy fairly rapidly lost value. Those that “failed” and returned money to investors turned out to be better investments.

Of course, that pattern — along with the slide in GLG’s share price from its 2007 peak — has a lot to do with conditions in financial markets. But then again, SPACs existed largely because money was burning holes in investors’ pockets at the height of the boom, so it’s not surprising that many of their deals were badly timed.

The end of GLG’s term as a listed company almost qualifies as an epitaph for blank-check companies more broadly. They are still out there, but the appearance of new ones has slowed to a trickle. Investors might keep in mind that if and when the phenomenon re-emerges, it may mean the next bubble is about to burst.

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