As financing difficulties persist in the small cap market, a growing number of private companies and dealmakers are looking at the potential benefits of shell companies with cash already on the books.

These companies be listed either over-the-counter or on an exchange, each with a slightly different set of steps required for a reverse merger.

"More people are looking for shell companies that already have cash," said David Feldman of the law firm Feldman LLP.  "Raising PIPE money alongside a reverse merger is still often difficult to do, so theoretically this could make the reverse merger process much easier."

However, the reality of successfully finding and merging with a shell that has cash is a very difficult task, according to attorney Doug Ellenoff with Ellenoff Grossman  Schole, who has worked with a number specified purpose acquisition companies. "If a company can pull it off, this is the best of both worlds," said Ellenoff.

Unlike a SPAC, which allows a management team to raise capital in an initial public offering to acquire an operating business, there is often no shareholder vote required in a cash shell merger, Ellenoff said.

However, most public companies would not want to be a part of this type of transaction, he said.  It will often only work if the company is floundering and under significant pressure from its shareholders.

There are several situations where exchange-listed companies are in the process of being turned into de facto shell companies - and some have considerable amounts of cash.

The Milpitas, Calif. -based data storage company Adaptec Inc., has been struggling for some time and last week came out on the losing end of an aggressive proxy fight with the activist investor Steel Partners that has been going on since the summer.

Adaptec has about $385.6 million in cash, cash equivalents and marketable securities.

Essentially, Steel Partners' plan is to sell off the operating business of Adaptec and use the remaining cash to create "shareholder value."  On Friday last week the hedge fund said that it received the necessary consent solicitations from Adaptec shareholders allowing Steel to remove chief executive and board member Sundi Sundaresh and board member Robert Loarie.  Independent chairman Joseph Kennedy resigned.

Before the consents were tallied, Kennedy said in a letter that Steel Partners' intentions were to turn Adaptec into a blank check company.  Adaptec would be a SPAC, albeit with an unknown or undisclosed investment purpose," he wrote.

However, a person inside the situation described Adaptec's message as a "scare tactic," and that the company is consistently releasing misinformation to its shareholders in order to convince them to oppose the hedge fund's plan.

The person said that it would not be possible for Adaptec to be turned into a SPAC, which has very specific rules and parameters.  Steel Partners has not officially said what it will do with Adaptec now that it was able to remove the executive and directors, but the person inside the situation used the phrase "public shell with cash" in describing what the company could become.

Steel Partners controls a minority position in Adaptec of about 12.8% and holds three of its seven board seats.

A second company, Zapata Corp., formerly in both the oil and food business at various points in its past, has had no operations since spinning off the last of its food-related operations in December 2006.  Harbinger Group, a hedge fund focused on distressed companies, acquired a 52% stake in Zapata this summer and last week said that it is reincorporating the company in Delaware as Harbinger Group Inc.

"Harbinger acquired 52% of Zapata in June as part of our strategy to potentially utilize a publicly traded vehicle for strategic acquisitions," said Charles Zehren, a spokesman for Zapata.  "Currently Zapata has no operating business activity, but has total assets of $163 million principally comprised of cash and cash equivalents.

Zapata also controls the Bulletin Board shell Zap.com, which is the result of a failed internet start-up that Zapata tried during the dot-com boom.  Zehren did not say how the shell will fit into Harbinger's plans.

Though it has no operations, Zapata continues to be listed on the Big Board of the New York Stock Exchange.  A person with knowledge of the listing regulations at the NYSE said that the company is able to remain listed simply by meeting the qualitative requirements for shareholders and public float.  Stock in Zapata, trading near its 52-week high, closed at $7.01 on Tuesday.

The person referred to entities like Zapata as "operating holding companies."  These companies typically have a long listing history and these periods as holding companies are generally short-lived.  Zapata was founded by a group of oil entrepreneurs that included former President George H.W. Bush in the early 1950s.  The compliance department at the NYSE has a great deal of discretion over what can and can't remain listed, he said.

Tim Brog, who heads up the Nasdaq-listed cash shell Peerless Systems, said that the companies like his do not have the time pressure that comes with a SPAC and can potentially avoid the obstacle of the shareholder vote.

Peerless Systems has about $42 million in cash and a market cap of about $39 million.  It is able to remain listed on the Nasdaq since it still has a minimal technology business.  Brog would not provide details of potential merger talks, but said that the company is actively looking for an operating business.

One hindrance of a reverse merger involving one of these cash shells, according to both Brog and Feldman, is that the deal could trigger an exchange's change-in-control provision, which would require a new listing application.  Brog said that these rules are only triggered when more than 20% of the stock is used to acquire the target company.  If cash is used to acquire the private company, the provision can potentially be avoided.

While searching for a merger target, Peerless is also agitating for a similar change at the asset manager Highbury Financial, which coincidentally was brought public through a SPAC merger in 2006.

Peerless, which controls about 20.4% of Highbury, said that the company has maintained poor corporate governance practices.  Peerless is seeking to eliminate Highbury's "poison pill" or anti-takeover provisions.  "Peerless is doing the same thing as Steel Partners," Brog said.

For his part, Feldman said he is seeing more companies seeking to bring in the shell component to their going-private strategy.  For a company choosing to go private, it could sell its operations for cash and distribute some of that money to shareholders through a dividend, but also keep some of it with the company.