Why 'blank check' companies are all the rage

Back before Omar Ishrak retired last year as the chief executive of Medtronic PLC, run out of Fridley, it's unlikely the board ever gave him $15 million to buy whatever he wanted.

Yet Medtronic seems ready to give that to him now that he's the co-founder and chairman of the board of something called Compute Health Acquisition Corp.

What Compute Health will do with Medtronic's money can't be known, because this is a special purpose acquisition company, usually called a SPAC or a blank check company.

It's going public without a business, so there's nothing to analyze or carefully weigh against any other alternatives for Medtronic's $15 million.

Medtronic's pledge to invest so far isn't binding, but if it goes ahead this deal might turn out to be a rewarding investment. Ishrak's record is as proven as any executive in his industry and he has colleagues with strong resumes, too.

Maybe it's a sign of how powerful this SPAC boom has become that even industry statesmen such as Ishrak have come up with one.

Compute Health filed to go public last week, with a right to buy into any industry but with an intention to find an acquisition in exactly the line of business its name suggests, at "the intersection of computation and healthcare." Its plan is to sell at least $750 million in stock and warrants to the public.

Last week saw more than two-dozen other new filings by SPACs seeking to go public, a speculative bonanza in SPACs that just keeps rolling. At least 79 have gone public this year already and about 250 of them went public last year, raising more than $100 billion. The vast majority are still empty shells in search of a business to buy.

This could become a fine illustration of an old observation in investing: A shortage of money is rarely the problem; a good deal is always hard to find.

This blind pool model has been popular before, and it really hasn't changed. These companies raise money on the strength of reputation, management track record and speculative hope, then go find a business to acquire.

Once the deal closes, there's a newly public operating company with what's left of the IPO proceeds after, among other things, the investment bankers deducted their considerable fees.

As for the "sponsor," meaning the investment firm or group of executives who put together the SPAC, they end up with a big chunk of ownership they may not have even had to pay for.

The traditional route of going public via an initial public offering is still open, and there have been some high-profile IPO successes of late, too. The surge in SPACs is in part an acknowledgment that the IPO process is cumbersome and carries with it some legal risk, when putting together an in-depth story of the business and collecting in one spot the information deemed important for investors.

Combining an operating company with a public company isn't exactly light work, though, and that includes preparation of disclosures for the shareholder vote that might end up as thick as one of those IPO registration statements.

What really seems to be happening here with SPACs is more or less the same business activity — going public — taking place in a different market where the regulations let people get away with more.

When a company sells stock to the public for the first time, there are both rules and common-sense limits to what managers say about future prospects.

But the managers of a private company targeted by the SPAC aren't taking it public via a closely regulated process. They are completing a merger.

Yes, the sole point of the merger is to take the business public via that blank check company, which had no operations and a corporate headquarters that was probably just a filing cabinet in some trust company office.

How free have executives found this environment for saying just about anything they want? Just for fun, investors may want to look back at some of the coverage before the June 2020 merger of electric- and hydrogen-powered truck startup Nikola and something called VectoIQ Acquisition Corp., particularly any interview with Nikola founder Trevor Milton.

He didn't sound like a prospective CEO of a publicly held company. More like a boisterous hockey fan enthusiastically talking up his team's prospects for the Cup.

Milton left the company in September after allegations he had misled investors.

Attorney Phil Colton, of Winthrop & Weinstine in Minneapolis, said he isn't convinced the appeal of SPACs is about avoiding the regulatory oversight of traditional IPOs, adding that "the smart thing to do" is stay away from banging the drum for your company whether it's privately held or has filed to go public. He later forwarded a helpful article that explained some of the ways SPAC managers, sponsors and target-company managers still could incur a bunch of legal or regulatory enforcement risk.

With provisions like having to return the money to shareholders in two years if no deal materializes, he said, there are also specific investor protections baked into SPAC offerings.

Either way, he said, "it still comes down to what is the business and does the deal make sense and who is running it."

Maybe the whole SPAC phenomenon is just another version of betting on the jockey and not the horse, as another old expression in investing goes. Although in this case, there's no horse even standing there to ignore.

There have also been famous investors who occasionally put it exactly the opposite way, including Berkshire Hathaway's Warren Buffett, who has said that a ham sandwich could run the Coca-Cola Co., long part of Berkshire's portfolio.

The horse-vs.-jockey analogy has always seemed to be a silly way to frame investment decisions. It's tough enough to consistently generate good returns by carefully considering the horse, the jockey and every other bit of information that might mean something.

Maybe by the time this SPAC boom ends, some investors will have rediscovered that bit of wisdom.