Beware Special Purpose Acquisition Companies

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Imagine that you were able to buy shares of a holding company before it actually held anything other than straight cash, that’s what investing in a special purpose acquisition company (SPAC) is like. A SPAC, usually run by relatively well-known hotshots, is a shell company that seeks to raise money that they will use to purchase a business and run it better. It was recently the target of a “Stocks to Avoid” column in Smart Money magazine (page 28, June 2006 issue) and I myself would have serious reservations about investing in a shell company whose business plan is as weak as any of these SPACs.

The interesting part is that the SPAC usually guarantees that if they don’t find a takeover candidate within 18 months, they will return your money less 20% for lawyers and underwriters! Seems like a shady operation to me. Here are some names and tickers of SPACs:

  • Good Harbor Acquisition Partners (GHBBU)
  • Acquicor Technology (AQR/U)
  • Services Acquisition (SVI)
{ 6 comments, please add your thoughts now! }

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6 Responses to “Beware Special Purpose Acquisition Companies”

  1. CK says:

    This is actually a legit business model. It is also as you point out a risky investment. Boom or bust pretty much.

  2. Anonymous says:

    Beware Special Purpose Acquisition Companies

    Blueprint for Financial Prosperity has a short discussion of a new high risk class of stocks that are called special purpose acquisition companies. These stocks look like a high risk gamble to me.

  3. DebtBlog says:

    While you could do really well if you got in with the right oone, it sounds like a great way to know right up front you’ll come out minus 20%. A great deal for those at the helm of one of those things. Great plan: Get a bunch of investors; use their money to buy a business or two; if it doesn’t work out, pocket 20%. How can I start one of these? Anybody want to send me some money?

  4. Andrew says:

    You can buy into these stocks for $6-$8 per unit, allowing for the average investor to participate. Depending on how many units you purchase your potential losses could be minimal. Not so sure if betting the whole house on these investments is the best idea. It depends on your situation. Here is another article about these investments.

  5. Milatova says:

    does that mean they actually earn 20% even if they do exactly nothing for a year? Sounds like a perfect business to me! For them, I mean 🙂

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