This IPO is a blank check

(Fortune) -- As early investors in the Tommy Hilfiger fashion empire, Lawrence Stroll and Joel Horowitz made a fortune turning the designer's preppy style into a $2 billion business.

Now Stroll and Horowitz want to replicate their success as principals in Global Brands Acquisition Corp., which is looking to raise $250 million from an initial offering of stock, according to Securities and Exchange Commission filings.

Global Brands isn't your typical company. Known as a "blank check" firm, or special purpose acquisition company (SPAC), Global Brands doesn't yet sell products or otherwise generate revenues. Instead, like other SPACs, it plans to raise money from the public to acquire privately held companies.

SPACs have soared in popularity in recent years. So far this year, some 40 blank check companies have raised $5.3 billion through public offerings, compared to 13 companies that raised $484 million in all of 2004, according to Dealogic.

Investors like them because they can participate in early stage deals that offer more transparency and liquidity than private equity transactions do. And downside is limited.

Unlike blind pools popularized in the 1980s that became known for fraud, a SPAC is required to give investors their money back (minus underwriting fees) if a deal is not done in 18 to 24 months. Once a target company is chosen, 80 percent of the SPAC shareholders must approve the deal. Those who oppose the transaction can sell their shares.

Blank check companies, however, can be risky investments.

For one thing, because a SPAC isn't an operating company at the time it goes public, shareholders are betting on the history of the management team. And there's no guarantee that any of the targeted companies will turn out to be smart acquisitions.

What's more, critics argue that the process allows private companies to skirt the normal SEC vetting process because, once a blank check company acquires them, they automatically become publicly traded.

"It's a bit of financial alchemy," said one hedge fund manager who has looked at these deals.

Of the 125 SPACs that have registered to go public since 2004, 59 have announced an acquisition, seven have liquidated and the rest are still on the hunt for transactions, according to Dealogic.

One of the best performers has been Endeavor Acquisition Corp (Charts)., whose shares are up nearly 50 percent since they went public in March 2006.

That gain is the result of Endeavor's purchase last year of American Apparel, the fast growing maker of T-shirts and leggings for trendy urbanites. Observers doubt that American Apparel would have passed the litmus test for a traditional IPO, given that its chief executive Dov Charney is the target of several lawsuits filed by employees who accuse him of using foul language and showing his underwear. Charney denies the charges.

Juniper Content Corp. (Charts), formerly Juniper Partners Acquisition Corp., hasn't fared so well. Its stock is down 63 percent, to $1.85 a share, since public trading began, despite having acquired Firestone Communications, owner of a Hispanic children's television network.

For Global Brands Acquisition, much is riding on the track record of its founders who, after putting up $30 million in a private placement, will own one-fifth of the company. Global Brands executives declined to comment for this story, citing the SEC quiet period ahead of the company's offering.

Stroll, who will serve as chairman, hasn't been able to replicate his Tommy Hilfiger success. He and other investors lost a reported $500 million trying to turn the 18th Century British luggage and jewelry makers Asprey and Garrard into a global luxury empire. The brands were sold to two private equity firms for an undisclosed sum in 2006, six years after Stroll bought them.

Stroll also bought a controlling stake in the Michael Kors fashion house. Though he once boasted the brand would have $1 billion in sales and 100 stores by 2009, actual results are falling short of expectations. Industry sources say sales to department stores continue to hover around $100 million. According to the company's website, there are only 18 boutiques.

Another player in Global Brands is John Idol, a Michael Kors investor and its current CEO. Idol is perhaps best known for selling Donna Karan, where he served as CEO, to LVMH Moet Hennessy Louis Vuitton for $645 million, a sum that has given the French luxury goods giant indigestion ever since.

For their part, Stroll and Horowitz had a spotty record running Tommy Hilfiger for most of the 1990s. Two years ago, the company paid $18.1 million to settle government charges of tax evasion dating to Stroll and Horowitz's time at the helm.

Both men were also named in a 1998 shareholder lawsuit that accused Tommy Hilfiger officials of "self dealing" in the purchase of two licensees, Pepe Jeans USA and Tommy Hilfiger Canada. As owners of the licensees, the lawsuit argued that the executives stood to make "windfalls" from the deal. The New York State Supreme Court dismissed the suit, citing improper jurisdiction.

None of these issues is likely to derail Global Brands offering, which is being underwritten by Citigroup (Charts, Fortune 500) and is expected to price early next year.

So what will Global Brands buy?

The company isn't saying, but observers point to one possibility that would seem to fit a pattern: A buyout of Michael Kors. "It would be just like the Pepe jeans deal," said one industry insider, "where they pay themselves to buy a company they own."