SPACs gain ground in federal M&A action

‘Blank-check’ companies reach important milestones

Once not well-known, special purpose acquisition corporations (SPACs) are adding new fuel to the buyout fire in the federal market, helping stoke a resurgence in mergers and acquisitions activities.

Sometimes called “shell” or “blank-check” companies, SPACs raise public money to finance acquisitions. They typically have no operations and exist solely to launch an initial public offering and purchase companies. A SPAC generally has 24 months from the date of the IPO to complete its first deal. If it fails, it must return the investors’ money.

Federal Services Acquisition and Fortress America Acquisition represent the SPAC investment vehicles in the public-sector market. Both have recently reached important milestones.

Fortress America announced a definitive agreement earlier this month to purchase VTC, which designs hardened data centers and command and control facilities. Meanwhile, Federal Services meanwhile is moving closer to completing the acquisition of Advanced Technology Systems (ATS), a systems integrator based in McLean, Va.

Federal Services and Fortress America are just two of the dozens of SPACs that have surfaced throughout various industries in recent years. But their arrival in the government realm attests to the current health of the federal mergers and acquisitions market, according to Larry Yanowitch, a partner in the Northern Virginia office of Morrison and Foerster and co-leader of the law firm’s mergers and acquisitions group.

The ability of government-oriented SPACs to complete successful acquisitions could lead to more of them entering the federal market, industry executives say.

Different approaches
Although Federal Services and Fortress America target the government, they take somewhat different approaches.

The ATS deal, if consummated, would provide Federal Services with a platform company whose customers include the Defense Department, the Homeland Security Department and the Department of Housing and Urban Development. It calls for a purchase price of $84 million in cash and $1 million in stock.

Fortress America focuses on homeland security and seeks companies capable of doing business in government and commercial markets. Its interests range from access control systems and smart cards to vehicle armor and blast protection, according to its March filing with the Securities and Exchange Commission.

Harvey Weiss, Fortress America’s chief executive officer and president, said the company is interested in acquiring firms with intellectual property, but he added that there are no restrictions on product companies with patents.

The acquisition of VTC, worth $38.5 million, leans toward the services category. VTC does business as Total Site Solutions and Vortech, which designs mission-critical facilities for data centers, network operations and other information technology-intensive operations. The business is roughly 80 percent government-related and 20 percent commercial.

Pros and cons
One benefit of the SPAC approach is the ability to unite companies within a given vertical market.

“SPACs will be out acquiring companies that have different capabilities in related business areas and bring them together to focus on an integrated solution,” said Bob Guerra, partner at Guerra Kiviat. He predicted that SPAC activity will become significant in a range of vertical markets, including the public sector.

For the acquired company, a SPAC offers a fast track to the public market and a higher profile. SPACs appeal to a seller “who has a company in the $100 million to $200 million revenue range and wants to be a public company, but doesn’t want to go through the normal IPO underwriting process,” Yanowitch said.

Weiss said SPACs take “the risk out of going public.” Another plus, he added, is that SPACs allow the owners of the acquired company to remain in control.

But the critical question is whether the SPAC formula can succeed in the competitive federal market. “The jury is still out on that,” Yanowitch said.

Federal SPACsThe following special purpose acquisition corporations operate in the government sector.

Fortress America Acquisition Corp.

  • Initial public offering: July 20, 2005.

  • Net proceeds: $38.7 million.

  • Focus: Dual-use homeland security products and services.

  • Next step: Close acquisition of VTC.

Federal Services Acquisition Corp.

  • IPO: Oct. 25, 2005.

  • Net proceeds: $119.2 million.

  • Focus: Government services market.

  • Next step: Close acquisition of Advanced Technology Systems.


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