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Blank Check IPOs Bring Hope and Caution to Malaysia

Kuala Lumpur, Malaysia
Karin Slade | The Image Bank | Getty Images
Kuala Lumpur, Malaysia

Malaysia's bull market is seeing a type of initial public offering, still fairly new to Asia, that takes a special kind of company public: one with no profits, revenues or assets.

Cliq Energy last week became the second such firm - known as a special purpose acquisition company (SPAC) - to list in Kuala Lumpur and three more are preparing IPOs. The spurt comes after Malaysian equities rose for four straight years, including a banner year for IPOs in 2012, and as investors anticipate a jump in mergers and acquisitions in Southeast Asia.

But SPACs have historically been high-risk, high-reward investments. Some U.S.-listed SPACs have performed well and built market value, while others have failed to make any acquisition and were forced to delist.

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"If the historical experience in the U.S. is any indication, it should provide a warning sign that these investments may not turn out to be particularly good ones," said Stefan Lewellen, a SPAC expert who authored a study on U.S. SPACs at Yale University.

Listings of SPACs are also known as blank check IPOs, because such companies raise money through the stock market without a single asset on their books. SPACs are mere shell companies, with no business to speak of other than a plan to buy corporations that will be folded into the entity.

Investors in a SPAC typically buy a unit and receive a warrant, which trades separately and can only be exercised when the company completes a takeover. Some investors prefer to take a position on a SPAC's warrants, which are cheaper than units, but the holdings can turn into dust if no acquisitions are made.

Cliq Energy raised $120 million through its IPO to buy oil and natural gas assets in Asia Pacific. While the funds raised surpassed the company's minimum target by more than twofold, its units slumped 24 percent on its debut as investors sold off the unit to take a position in Cliq's warrants. The warrants have doubled in price since the IPO, underscoring the speculative nature of the investment.

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Three more Malaysia-based SPACs - TerraGali Resources Bhd, Australaysia Resources and Minerals Bhd and Sona Petroleum Bhd - are slated to list in the coming weeks with a combined value of at least $300 million.

New to Asia

SPACs are relatively new to Asia, with South Korea the only other established market for such products.

In the United States, there is a long line of examples where such companies failed to make an acquisition and were forced to delist. Even those that did make a deal, on the whole, have not historically performed well.

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U.S. SPACs that declined since completing acquisitions include 57th Street General Acquisition Corp, down nearly 80 percent from its IPO, Jaguar Acquisition Corporation, down 97.5 percent, and Ideation Acquisition, down 83 percent.

Lewellen's research showed that U.S. SPACs with completed acquisitions between 2003 and 2008 posted negative returns in excess of 36.5 percent a year.

In another study, only half of all SPACs launched in the United States in the last 10 years have completed an actual acquisition, and have posted negative annual returns of 18.6 percent on average, according to figures from research firm SPAC Analytics.

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According to Thomson Reuters data, 247 SPAC IPOs have raised $27.7 billion since 2003 in countries including the United States, Britain, the Netherlands and Germany.

Hedge funds and other institutional investors make up most of the buyers of U.S. SPACs, according to the data. That only adds to the challenge of them catching on in Asia, where markets such as Malaysia, South Korea and Greater China are driven heavily by retail investors.

Most of the SPAC listings took place during the boom years in capital markets, with issuance peaking in 2007 at $10.9 billion from 82 offerings.

"SPACs were popular in the U.S. and now are sort of dead," said an equity capital markets banker in Hong Kong, who was not authorized to speak publicly on the matter. "I'm very skeptical on SPACs. It's risky, it's illiquid. It's a very difficult product to become mainstream."

But not all shell companies are equal.

Southeast Asia's first listed SPAC - Hibiscus Petroleum - has doubled since listing in Kuala Lumpur in July 2011. Hibiscus is now an oil and gas exploration firm after making acquisitions in the Middle East and Norway.

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Korean Lesson

The structure of SPACs is similar in most countries, with about 90 percent of the IPO funds held in a trust until a takeover target is found. Because the IPO proceeds are invested in government bonds or money market funds until the SPAC makes an acquisition, returns should mirror those of a fixed-income fund - but that has not always been the case.

After a spurt of listings and a surge in prices in 2010, SPAC issuance in South Korea ground to a halt as prices crashed and companies delisted. Daewoo Securities Green Korea SPAC and Mirae Asset No. 1 SPAC, the first two listed, were among companies that surfed on the retail investor frenzy and nearly doubled in price within weeks of their IPOs.

"Those kinds of stock bubbles were caused by ... financial illiteracy of individual investors," said Kab Lae Kim, head of corporate policy at the Korea Capital Market Institute in Seoul and author of a report on SPACs.

"In that sense SPACs have lost market confidence."

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