Surge in 'Blank Check' Companies Keeps SPAC Specialists Busy

Kirkland partner Christian Nagler is quoted in The American Lawyer regarding a recent uptick in special purpose acquisition company (SPAC) activity.

What do former Speaker of the House Paul Ryan, one-time Trump chief economic adviser Gary Cohn, and Oakland A’s executive vice president Billy Beane have in common?

The three have all recently taken leadership roles in SPACs, also known as “blank check” companies. Similar to traditional initial public offerings, these “special purpose acquisition companies” raise capital, but they do so specifically for the purpose of acquiring another business, whose identity is unknown at the time of formation.

But while the list of luminaries attaching their names to these vehicles keeps growing, much of the grunt work behind these transactions remains in the hands of a small group of lawyers who’ve been in the game for well over a decade. While most of them have been entrenched in their current firms for years, White & Case made a splash in June when it hired a three-partner team led by Joel Rubinstein from Winston & Strawn.

“It’s incredible to me how quickly it’s gone from a niche product—where, if you did seven to eight IPOs a year, you were a leader in the market—to this year when we’ve done 22, and 14 at White & Case just in the last two months,” Rubinstein said.

These transactions ultimately have two parts. The IPO is just the first step. Once created, the SPAC generally has two years to acquire a private business, in a deal known as a “de-SPAC” transaction. Many of these new publicly traded companies have seen immediate bumps on the stock market. When space exploration startup Virgin Galactic merged with SPAC Social Capital Hedosophia in October 2019, the stock started trading on the New York Stock Exchange at $12.34. It hit a high of $42.49 in February. Likewise, DraftKings climbed from $20.49 when it started trading in April to a high of $44.79 in June.

“DraftKings was probably one of the catalysts, because it performed so well. They were a company that could have had options to do things in a number of different ways,” added Rubinstein, who represented the SPAC that acquired the company while at Winston and the underwriters in a June deal to sell $1.8 billion in stock after his team’s move to White & Case.

“As we see more and more successful back-end transactions, the ‘de-SPACing’ process is becoming an even more popular alternative to the more traditional IPO process,” Kirkland & Ellis capital markets partner Christian Nagler said in an email.

His firm has been involved in 16 SPAC IPOs so far this year, according to market watcher SPAC Research, behind only Skadden, Arps, Slate, Meagher & Flom.

Billionaire hedge-fund manager Bill Ackman’s groundbreaking $4 billion SPAC, which went public in July, has only added to the recent buzz. But even before that, sponsors had been working to raise more and more money, allowing them to go after more significant targets.

“Originally, $100 million was a pretty big SPAC,” said Skadden partner Gregg Noel, who has advised on over 140 of these IPOs since 2006. “In May, pre-Bill Ackman, the average size was $300 million.”

Douglas Ellenoff, a founding partner at New York boutique Ellenoff Grossman & Schole, has been involved in over 260 of these mandates, with the vast majority falling since the early 2000s. An existing relationship with an investment bank provided the entry point, and the firm’s work helped usher in a new era of commercial interest in the format.

“We changed and tinkered with a lot of the features to improve in the program and eliminate some of the regulatory tension that the SEC didn’t like, and other features that business people thought were causing problems,” he said. 

But the Great Recession largely took the wind out of the sails for these arrangements, until they began to reemerge around 2013.

“By then, there were no regulatory issues, and the features had come into focus,” Ellenoff said. 

The SEC has made it easier to take small companies public, and interest in underwriting these initial IPOs has grown beyond the “bulge bracket” banks which dominated in the previous decade. Recent changes in stock market regulations that have made it easier to finalize an acquisition within the two-year window have also made a difference. Companies that are interested in going public are also disillusioned with the traditional IPO process, including the rigidity of pricing and the demands of the road show model. And a busy 2018 and 2019 has paved the way for a record-breaking 2020.

“It’s easier to find people who want to sell to a SPAC. You don’t need to tell them what it is. It’s in the press every day,” Noel said.

One consequence is that there’s plenty of work to go around for established SPAC practitioners.

“I’m getting inquires from clients and friends of clients multiple times a week,” said Akin Gump Strauss Hauer & Feld corporate partner Alice Hsu, whose been working in the space for over a dozen years, dating to her time as an associate at the firm. 

While there’s some concern that the market may be temporarily saturated, particularly with a number of players lined up for deals in the fall, practitioners also believe that SPACs have staying power. Noel said they’re now the ”fourth leg of the stool” for private equity companies looking to unload portfolio companies, along with strategic mergers, sales to another private equity shop, or a traditional IPO.

“As it becomes another tool in the toolbox, that makes it more realistic that it will stay that way,” he said.

Davis Polk & Wardwell corporate partner Derek Dostal, whose firm has been in the game since 2006, came to the same conclusion.

“I don’t think we’re going to see the robust focus that we saw over the last five months replicated in the next five months, but I expect the product is here to stay,” he said. And yet, his firm is in no hurry to add attorneys who focus on these arrangements.

“We’ve had a great run this year and we’re really happy with our market share,” Dostal added.

Indeed, with the exception of Rubinstein and his colleagues move to White & Case, the lateral market for these specialists has been quiet.

“There’s certainly people that think it’s a hot area, but it’s definitely not across the board,” Manhattan-based legal recruiter Mark Rosen of Mark Bruce International said.

And yet, Rubinstein’s own experience shows that such hires can deliver real benefits to firms who are already strong in connected practices.

“We came in with nine people, but we needed a lot more,” he said. “We’ve been working with, I won’t exaggerate, dozens of White & Case lawyers both on the capital markets side and the M&A side.”

And Noel said that the law firms who’ve thrived through a focus on private equity transactions, including his own, offer a useful comparison.

“From a law firm perspective, it does make sense to pay attention because it can feed ancillary areas, particularly on the de-SPAC-ing side, and your entry into it is the IPO,” he said. “Like what the private equity firms do today, it’s a different way to get into exploiting the resources you have in the law firm.”