‘Blank-cheque’ blitz: Michael Klein leads Wall St charge into Spacs

Michael Klein has spent much of a long career on Wall Street courting chief executives, big corporations and governments with the promise of sage advice on their biggest decisions.

The former Citigroup banker is now turning to his extensive Rolodex for his latest act: creating shell companies, listing them on the stock market and then using the money raised to merge with real businesses.

Long confined to the periphery of finance, special purpose acquisition companies, or Spacs as the shells are known, have emerged as one of the hottest trends on the US equity market in a year defined by the coronavirus crisis.

This month one of Mr Klein’s four Spacs struck an $11bn deal for US healthcare company MultiPlan, underlining how Wall Street’s establishment is racing to embrace these so-called blank-cheque vehicles. Hedge fund billionaire Bill Ackman and Chinh Chu, a former Blackstone partner, are among those riding the wave of demand for Spacs with their own ventures.

For the often already wealthy Spac creators, or sponsors, the vehicles hold out the promise of even greater riches. Investors buying shares in the shells are making their own wager: that the reputation of the Spac founder will translate into the purchase of a great company at a good price.

“Everybody who has any standing in their sector is thinking about a Spac,” said Anu Aiyengar, co-head of global M&A for JPMorgan Chase. “Spacs are reaching out to pre-IPO companies and saying they should view this as a safer way to go public and a credible alternative to an IPO”. 

Column chart of Proceeds raised from US Spacs ($bn) showing Booming investor appetite for shell-based deals

Spac founders say they are fixing problems that can bedevil companies in the conventional stock market listing process. The amount of capital a company raises in an initial public offering can, for example, change just hours before the listing is finalised as bankers suss out demand. In the case of a Spac, that and the company’s valuation are agreed in advance when a private company combines with the shell listing.

Critics, however, contend that the vehicles are overly generous to their founders, lack transparency and are often riddled with hot-money investors who have no intention of becoming long-term shareholders. 

“Spacs are a good idea but the terms have historically been very investor-unfriendly and too promoter-friendly,” according to one sponsor who has previously launched a vehicle. “It’s a structure that has a chequered reputation because the underwriting fees are enormous, the promoters can end up with a lot of stock and it used to have a bad record.”

As with every trend on Wall Street since the financial crisis, when central banks stepped into support markets and then stayed, some offer a simpler explanation for the buzz around Spacs.

“There is no magic to it,” said one banker. “There’s just a lot of money out there looking for a home.”

While the forces driving enthusiasm for Spacs may be complex, the numbers are clear.

So far this year, newly created Spacs have raised $13.5bn. That is double the total at this point last year and just $400m shy of the annual fundraising record, data from Refinitiv shows. The near frenzy of launches suggests 2020’s total could yet surpass the $26bn raised in the previous two years combined.

“There has been a continued shift in the quality of the teams that are sponsoring Spacs and driving investor demand,” said Olympia McNerney, head of US SPACs at Goldman Sachs. “It’s high-profile company executives, industry veterans and investors who have tremendous expertise. Spac sponsors coming to the table have real credibility and they’re of a different calibre to five or 10 years ago.”

But the record fundraising wave is also reshaping an industry that was until recently a backwater in finance. More money means larger companies need to be targeted while the entry of high-profile Wall Street figures brings greater scrutiny.

With the $11bn MultiPlan deal, Mr Klein sealed the largest transaction by a Spac. On top of the $1.1bn raised via the listing of the vehicle, known as Churchill Capital Corp III, the financier was able tap a further $2.6bn in new equity and debt from investors after selecting MultiPlan as its target. That a relatively small amount of initial cash can be used to combine with a company of MultiPlan’s size widens the universe of potential targets. 

The 56-year-old has raised $2.5bn since 2018 through three Churchill vehicles that take their name from the British wartime leader whose quotes and paraphernalia line the walls of Mr Klein’s Manhattan office. Last week, he filed plans to raise a further $1bn from the launch of a fourth.

Although his push into Spacs echoes that of hedge fund managers such as Mr Ackman and Dan Loeb, it marks a clean break with most of his rivals in the advisory business.

It leaves the boutique advisory firm he set up in 2010 looking more like the merchant banks that ruled Wall Street decades ago. M Klein and Co, which shuns having a website in a very public nod to a preference for discretion, employs more than 20 staff and advises management teams on corporate and governance issues.

MultiPlan chart circles v2

At the heart of the foray into Spacs is Mr Klein’s longstanding partnership with Jerre Stead, the former head of data and information provider IHS Markit. The two friends, who speak daily, merged Churchill I, which raised $700m in 2018, with private-equity-owned Clarivate Analytics, a former unit of data provider Thomson Reuters, in a $4.2bn deal in January 2019. 

Mr Stead, 77, took over as chief executive of Clarivate Analytics and overhauled its balance sheet. Shares in the Philadelphia-based company have more than doubled since early last year.

On a call setting out the MultiPlan deal last week, Mr Klein claimed that what set his blank-cheque vehicles apart was the roster of individuals who invested in the Spacs and worked with the target companies if they had relevant expertise. 

The group, which is called Archimedes Advisors and sits within Mr Klein’s firm, includes former Ford CEO Alan Mulally; Apple’s former design chief Jony Ive; Joe Ianniello, who used to lead CBS; and John Thornton, the ex-Goldman Sachs banker who chairs Barrick Gold. To help unearth companies, Mr Klein has also recruited Oak Hill CEO and founder Glenn August, who injected $500m into the financing for MultiPlan.

Rather than early-stage companies, such as space tourism business Virgin Galactic and electric truck manufacturer Nikola that have been swallowed up by Spacs, Mr Klein has so far targeted more mature businesses.

The plan for MultiPlan will echo that of Clarivate, with a $3.7bn cash infusion from the Spac, equity investors and bondholders to help cut its huge debts and then expand the business.

How Michael Klein made his name in finance

How Mr Klein made his name in finance

A protégé of former Citigroup chief executive Sandy Weill, Michael Klein spent 23 years at the US bank and left just before the 2008 crisis with a $28m exit package. He advised Barclays Capital on the acquisition of parts of Lehman Brothers later that year and the UK government on the bailout of its banking system.

Mr Klein grew the boutique advisory firm, M Klein and Co, that he set up in 2010, before pulling off the unusual feat of working on both sides of the merger between mining groups Glencore and Xstrata.

In recent years, Mr Klein has worked closely with the royal court of Saudi Arabia on the IPO of Saudi Aramco and with the kingdom’s sovereign wealth fund on a number of transactions.

He also advised on deals such as the $130bn merger between Dow Chemical and DuPont in 2015 and the $18bn combination of Barrick Gold and Randgold in 2019.

However, the real test will be whether a base of stable and patient shareholders can be built for MultiPlan, which has passed through the hands of multiple private equity owners since 2004. 

After announcing the deal, Mr Klein and his team set about trying to convince institutional investors to buy shares in the Churchill III vehicle that is merging with MultiPlan. The hope is that they would replace some existing shareholders, including hedge funds, that helped launch the Spac.

MultiPlan’s current owners, Hellman & Friedman, will control a 50 per cent stake in the company after the merger, which they can start offloading as soon as a six-month lock-up period is over.

Mr Klein is adamant that he and his partners are in it for the long run. “We are very long-term investors. We don’t have a fund. We’re investing for decades,” he said announcing the deal. “We’re not in the business of buying LBOs [leveraged buyouts]. We’re in the business of investing behind growing companies.” 

He has had plenty of time to get acquainted with MultiPlan — Mr Klein was helping Warren Buffett’s Berkshire Hathaway in 2013 when it considered buying the company.

The Buffett deal never happened, but it put MultiPlan and its long-serving chief executive Mark Tabak on Mr Klein’s radar. With a deal now secured, the banker once tipped as a potential CEO at Citigroup has to prove his latest act on Wall Street works for both shareholders and companies alike.