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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Tuesday, January 10, 2006: I bought some Vanguard Emerging Markets Stock Index Fund (VEIEX) last night. International remains on fire. Largest ten holdings in this fund, accounting for 18.9% of it, are:
1. Samsung Electronics Co., Ltd.
2 Taiwan Semiconductor Manufacturing Co., Ltd.
3 Teva Pharmaceutical Industries Ltd.
4 China Mobile (Hong Kong) Ltd.
5 Petroleo Brasileiro SA Pfd.
6. America Movil SA de CV
7 Kookmin Bank
8 Sasol Ltd.
9 Petroleo Brasileiro SA
10 Cemex SA CPO
The fund has returned 37.5% a year for the past three. I now own all Vanguard's international funds.

I also bought a small piece of a private equity deal. I'm going in directly with some private equity funds and some large private investors. My piece is tiny. I can't talk about the specifics. I also bought a small piece of a new biotech private placement. The company has a promising drug and promising management. The moral of these stories is that if you keep looking long enough, something interesting will eventually drop into your lap. When it does, you'd better be ready with a little time for your due diligence, the paperwork and some ready cash.

Many hedge funds are abandoning the stockmarket in favor of private deals and are using SPACs (Special Purpose Acquisition Companies), TACs (Targeted Acquisition Companies) and PIPEs (Private Investment in Public Equity) and pre-IPO financings. I don't fully understand these things. Their creation is a function of the trillion dollars of so sloshing around in hedge funds and looking for a new home outside of stockmarkets. Many hedge funds feel there are now too many hedge funds too quickly copying their each other's strategies, thus radically reducing the returns on their own clever moves. SPACs are especially interesting since they allow hedgies to publicly trade interests in private companies.

By way of explanation... earlier this year, The Washington Post wrote this:

C. Thomas McMillen, the former Maryland congressman and peripatetic entrepreneur, is having another go at the homeland security market, and former Homeland Security Department undersecretary Asa Hutchinson and former Sen. Don Nickles (R-Okla.) are along for the ride. McMillen formed Fortress America Acquisition Corp., which last week registered with the Securities and Exchange Commission to raise $42 million from investors in an initial public offering for a company that is essentially a leap of faith: It is a shell with minimal assets and no operations, only promises to buy companies in industries such as biodefense, hazardous material cleanup and emergency preparedness.

Hutchinson and Nickles have attached their names to McMillen's company, Hutchinson as a special adviser and Nickles as a board member, according to Fortress's registration statement with the SEC. But the mover behind the Bethesda company is McMillen, the 52-year-old founder and chairman, whose track record in the world of finance hasn't matched his prowess in sports and politics.

The 6-foot-11 McMillen was a star basketball player at the University of Maryland and a Rhodes scholar. He played 11 years in the NBA until 1986, then won the first of three terms as a Democratic U.S. representative from Maryland's 4th district.

McMillen's most prominent business venture since he left the House in 1993 was as co-founder and chief executive of Complete Wellness Centers Inc., a health care company that put together and managed alternative medicine centers. After a $6 million IPO in 1997, the company was briefly (and inconclusively) tangled in a federal health care fraud investigation in 1997 and 1998. McMillen's affiliation with the company ended badly: He sued Wellness after it terminated his employment agreement, according to SEC filings. Wellness, beset by creditor lawsuits, filed for bankruptcy liquidation in New Jersey in March 2001, with assets of $304,000 and debts of $4.4 million.

For much of the past six years, McMillen has been a merchant banker and has been affiliated with a number of small homeland security firms, either as an investor, director or adviser. He has also been chief executive of Washington Capital Advisors LLC, a Washington private equity firm. At various times over the past two years, McMillen has tried to raise money to buy homeland security companies, according to a half-dozen private equity investors who said they were pitched by McMillen, all of whom spoke of the private discussions on condition of anonymity. These investors describe McMillen as a smart, convincing salesman -- he has a deep baritone to match his imposing frame and politician's charm -- who is eager to build a company in the hot homeland security industry.

Fortress America is McMillen's third go-round with a holding company formed to buy disparate homeland security firms. In April 2003, he joined with Sky Capital Holdings Ltd., a New York investment firm, to launch Global Secure Corp. in Washington to buy small players in homeland security. In less than a year, after leading three acquisitions and recruiting former political and national security figures to Global Secure's advisory board, McMillen stepped down as chief executive. He stayed on as a consultant to Global Secure until February, when he severed his ties to the company. Global Secure provided no explanation for McMillen's departure. The privately held company, which has raised nearly $30 million from private venture investors, has not disclosed how its investments have performed so far.

McMillen formed Fortress America in December. According to its prospectus it will be pursuing the same market as Global Secure, which has an almost identical business plan and has focused its acquisitions so far on local emergency preparedness services and equipment. Global Secure chief executive Craig Bandes declined to comment.

After stepping down as chief executive at Global Secure, McMillen became chairman of a company called Global Defense Corp., an Arlington company that, like Fortress America, is a homeland security "consolidator," according to SEC documents.

McMillen could not be reached for comment, and the other organizers of Fortress America did not return phone calls and e-mails about the new venture. Information about the company was drawn from its SEC registration statement and additional reporting. The company's plan is to become, in effect, a publicly traded corporate buyout fund, known in the investment trade as a special purpose acquisition company, or SPAC.

When you invest in a SPAC you're buying the experience and merger-and-acquisition acumen of the executives involved, and you're betting on their ability to put together a real company with your investment.

SPACs are part of a broader category designated under Delaware law as "blank check" companies. Critics have said it's an apt name: In the 1980s, before the SEC toughened the rules for blank check companies, they were a favorite of penny stock promoters and were often associated with investment scams.

For all the risk, blank check companies can result in a substantial payoff for early investors -- if the companies invest well.

"They are for institutional, sophisticated investors," said Tim Halter of Halter Financial Group Inc., a New York firm that works with blank check companies.

Nationally, about a dozen SPACs are in registration or have sold stock in IPOs in the past year, according to a review of SEC filings. Most are raising capital for acquisitions of private companies in targeted industries -- health care, technology, industrial products, media and entertainment -- using both cash and their publicly traded stock as currency.

Fortress America's chief executive is Harvey L. Weiss. For two years until August, Weiss was chief executive of New York security software firm System Detection Inc. He has spent most of the past 35 years in executive roles at prominent information technology and network security firms.

Hutchinson is a former congressman who until recently ran the Homeland Security Department's border patrol and transportation security operations. An Arkansas Republican, he has announced he will run for governor of that state in 2006. Nickles, 56, retired from the Senate last year after 24 years and is now a Washington lobbyist. Fortress America's other outside director is David J. Mitchell, 43, who is a partner with McMillen in a "leveraged fund" called M&M Advisors.

McMillen and the other officers, directors and advisors of Fortress America can anticipate a big payout if the company succeeds.

On March 9, six key players bought a total of 1.75 million shares of stock in the company for 14 cents a share. Among the buyers were McMillen's Washington Capital Advisors, Weiss, Mitchell, Hutchinson and Nickles. The Paladin Homeland Security Fund, a Washington venture capital and buyout fund established last year by former Democratic Party operative Michael R. Steed, bought about 50,000 shares.

The 14-cent shares bought by Paladin and by Fortress America's organizers are being held in escrow but can be sold at the market price after three years, or whenever the company is sold or dissolved.

In its IPO, Fortress America is offering units, at $6 each, that provide one share of common stock plus warrants to buy two shares at $5 each. The warrants can't be exercised until the company merges with an operating company.

Fortress America isn't the only special purpose acquisition company in the Washington area looking to raise money in the public markets. Mercator Partners Acquisition Corp. is planning a $51.7 million IPO. Reston-based Mercator plans to use the money to buy companies in communications industries such as local and long-distance telephone, broadband, satellite, cable, and digital radio. Officials at Mercator declined to comment.

H. Brian Thompson, 65, a veteran telecommunications industry executive in the Washington area, is Mercator's chairman and chief executive. Rhodric C. Hackman, 57, is president; Lior Samuelson, 55, is executive vice president; and David Ballarini, 41, is chief financial officer. All three are partners at Mercator Capital, a privately owned Reston investment bank specializing in mergers and acquisitions of telecommunications, defense and information technology companies.

The organizers and Mercator Capital put up $247,500 to buy about 5 million stock warrants for 5 cents a share. The warrants entitle the organizers to buy common stock at $5 a share.

Mercator, like Fortress, is offering units in its IPO that include both common stock and warrants.

Morgan E. O'Brien, vice chairman of Nextel Communications Inc., and Alex Mandl, former chief executive of Teligent, are special advisers to Mercator Partners Acquisition Corp.

The Fortress America and Mercator deals have some elements in common. None of the executives of either company will make a salary until a merger is done, though in each case the companies are renting office space (at no more than $7,500 a month) from their organizers.

For Mercator, the IPO proceeds must be returned to investors if the company doesn't accomplish a merger or sign a letter of intent within a year. For Fortress America, the money will be returned if a deal is not signed within 18 months.

Lost luggage. Qantas lost my daughter's luggage going to Australia and coming from Australia. Qantas is, allegedly, a good airline. American Airlines, through a contract delivery company, is bringing her luggage -- perhaps. The company had over 300 lost bags to deliver in Boston last night alone. The problem of lost baggage seems to have escalated with he downturn in airline fortunes. There's probably a direct relationship between the price of gas and the number of lost bags. The lesson: Expect to lose your bags, especially on international travel. Carry three days of clothes onboard with you. (After I wrote this column, several readers called to say airlines lost their baggage also recently -- on both domestic and international flights. My daughter's bag finally arrived last night at 11:30 PM.)

A better bad blonde joke:
A young ventriloquist is touring the clubs and one night he's doing a show in a small town in Arkansas. With his dummy on his knee, he starts going through his usual dumb blonde jokes when a blonde in the fourth row stands on her chair and starts shouting:

"I've heard enough of your stupid blonde jokes. What makes you think you can stereotype women that way? What does the color of a person's hair have to do with her worth as a human being?

It's guys like you who keep women like me from being respected at work and in the community and from reaching our full potential as a person. Because you and your kind continue to perpetuate discrimination against not only blondes, but women in general, and all in the name of humor!"

The embarrassed ventriloquist begins to apologize, but the blonde yells, "You stay out of this, mister! I'm talking to that little shit on your knee."

The wife:
A woman's husband had been slipping in and out of a coma for several months, yet she had stayed by his bedside every single day.

One day, he motioned for her to come nearer. As she sat by him, he whispered, eyes full of tears,

"You know you have been with me all through the bad times. When I got fired, you were there to support me. When my business failed, you were there. When I got shot, you were by my side. When we lost the house, you stayed right here. When my health started failing, you were still, by my side.........You know what?"

"What dear?" she gently asked, smiling as her heart began to fill with warmth.

"You're a godamned jinx."

Recent column highlights:
+ Munich, the movie. A must-see. Click here.
+ Identity Theft precautions. Click here.
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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