Merger and Aquisitions - Check, please!

Check, please!

by Editor

Woody Allen once remarked that nobody wants to join a group that wants them. That is, people don’t often want what anyone can have; they want what not everyone can get. In dating, it plays out with people obsessing over a person just outside their reach. In business, it’s money. Those who want it have a harder time getting it than those who don’t need it, because those who need it will take it from just about anyone. But, if a company would take money from anyone, maybe that means you shouldn’t put your money into them. We’ve seen this in the direct response space. Many of the companies couldn’t have raised money even if money had an expiration date of yesterday, but now that they’ve made it, i.e. grown profitable businesses, money flocks to them. Ironically enough, you can find one of the best summaries of this fact on the Web 2.0 Facebook group, one meant for budding entrepreneurs, that read something to the affect of it becomes easy to get money once you’ve got money. In today’s hot but bumpy market, this can get carried out to the extreme with perhaps no better example than the subject of this week’s Digital Trends report. Those who marvel at certain people’s ability to raise money for dumb ideas will love the special purpose acquisition company or SPAC.

The special purpose acquisition company has existed for more than twenty years, but not until the last two years did they start to go from highly speculative, no truly upstanding person would form one to simply highly speculative. If the acronym SPAC doesn’t ring a bell, try their more commonly known name, a blank check company. The SEC provides a pretty good definition, but to really understand these publicly traded entities, just read an excerpt from Aldabra Acquisition Corp., which raised $44 million in 2005 whose managers said they “may consummate a business combination with a company in any industry we choose and are not limited to any particular industry or type of business.” Good for them; perhaps not as good for those putting up the money. Thankfully for investors, this operating freedom does not come without some basic accountability and safeguards, one of which says that money raised must sit in escrow until time of an acquisition, along with some time constraints – generally 18 to 24 months – before investors receive their money back (less IPO and other fees). And to insure that the managers of the business don’t find creative ways to abscond with the proceeds during those periods of inactivity, the SEC in the 1990s passed strict rules about how blank checks must be run. As noted in TheStreet.com, 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, which as they say still ends up being $90,000 a year.

As the stock market rebounded after the bubble burst, so too has interest in these acquisition corporations. They made headlines not too long ago when C. Thomas McMillen, a former Maryland congressman, NBA player and Rhodes Scholar raised north of $40 million in an IPO to buy a company that “contracts directly with the government on homeland security projects.” Called at the time Fortress America (now Fortress International Group, Inc.) To make the offering more palatable to investors, McMillen brought on other well known names, i.e. former Sen. Don Nickles (R-Okla.) and Asa Hutchinson, former undersecretary for the federal Department of Homeland Security, whose expertise should in theory assist in their stated objective. Not to be outdone, a year later, another SPAC garnered significant attention and even more money, Acquicor raised $150 million in an IPO and even managed to get a listing on the NASDAQ as opposed to one of the OTC (over the counter) indicies. Acquicor did so solely on the strength of its three creators, former Apple Chief Executive Gilbert Amelio, ousted from Apple in 1997, Apple co-founder Steve Wozniak, who at the time ran the now defunct wireless start-up called Wheels of Zeus (WOZ), and Ellen Hancock, Apple’s chief technology officer until 1997. Apple’s success with the iPod and general turnaround didn’t hurt Acquicor, even though the three ex-Applers had nothing to do with the its increased luster.

Now, it’s James Kimsey’s turn. Similar to Amelio and Wozniak, or McMillen, Kimsey comes armed with impressive credentials. He holds the title Founding CEO of America Online, running the company for ten years before handing over the reigns in 1996 and staying on as Chairman Emeritus. As though his business accomplishments didn’t carry enough weight, he “served three combat tours as an airborne ranger, two in Vietnam , earning various awards for service and valor” as well as Jim having accompanied former President Clinton to Vietnam, acting as Chairman of the Board of Refugees International, and later as Chairman of the International Commission of Missing Persons (ICMP). His list goes on and on from Capital One to the Washington Opera, and he has somehow found time to add another title to this long list, Chairman of Education Media, Inc., the SPAC that filed a little more than a week ago and led by another former AOL alum, Peter Kirsch. As their filing states, “Education Media, Inc. is a blank check company recently incorporated in the state of Delaware for the purpose of merging with…purchasing all or substantially all of the assets of…one or more operating businesses in the education industry focusing on distance learning, K-12 education, post-secondary education, corporate training, education software and related businesses…”

If successful, Education Media will enter this quest armed with $100 million less fees. The macroeconomic forces driving their interest won’t surprise anyone already in the direct response space, namely the success of the for-profit sector and growth those up and down the chain have seen from the institutions to the lead generators. Education Media faces some stiff competition, but they find themselves in a market that still has considerable fragmentation. In the space that we know, only a handful of companies have received significant capital and even fewer have come together to form a multi-disciplinary player. The real lesson if there is one here is not the money but execution. Can the team at Education Media put together pieces that when combined exceed the sum of their parts. Companies like Media Whiz have set the stage for this strategy in direct response marketing. As for Education Media, we’ll see if their entrance, and the potential influx of purely speculative money, bodes well or signals the beginning of the end.

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