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iamamartin (97.13)

Cheap Debt or Cheap Stocks - What's Driving the buyout mania

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July 17, 2007 – Comments (1)

Private Equity is loaded with Havard MBA types. Smart Type A personalities. So are they buying all these public companies with cheap debt or because the market hasn't valued the companies correctly ?

If it's cheap debt, then shareholders are (IMHO) likely to be on the winning side of the deal. Cheap debt drove the housing bubble and a lot of speculators are now nursing mortgage hangovers. If earnings only go up, like house prices, then the leveraged buyout craze means a lot of Harvard types are going to crash hard.

If it's cheap stocks.... then why won't the market value these companies to make them unattractive to Private Equity. I own Harrahs (I did before the buyout too) and I'm waiting for the deal to close wondering if we got ripped off or a great deal.

Are the latest deals better or worse for private equity or for shareholders ? Again Fellow Fools let me know your thoughts... they could save us all money.

 

1 Comments – Post Your Own

#1) On July 17, 2007 at 10:35 PM, StockSpreadsheet (65.89) wrote:

I think cheap debt is a big part of it.  If interest rates were at 20%, you wouldn't be seeing all of these deals taking place.  I do think the deals are going to get tougher going forward, because I think that financial companies are going to be more closely examining the deals to make sure the companies can repay the debt.  With all of the fallout of the sub-prime mess, I think lending standards will get stricter, so some deals won't get done that would otherwise have been done.

I also think that a lot of the companies are relatively underpriced, but only because private equity has an advantage to the market.  Once a private equity firm takes a company private, they can get rid of a lot of the people that the market requires but private equity does not.  This includes company spokespeople, some of the accountants, most of the lawyers, etc..  Anybody whose sole or main job was ensuring compliance with Sarbanes-Oxley or Reg. FD, (which companies keep claiming is significant numbers of their workforce and a lot of overhead), can now be let go as the private equity firms don't need to worry about this compliance.  (That won't be as true for companies like Blackstone Group now that they are public companies, but would still be true to some extent as they could consolidate the functions into a central location and would therefore need fewer people.)  Also, without having to worry about giving guidance, doing public speaking, attending shareholder meetings, etc., management can spend more time managing the company and less time managing the press.  This could benefit the company.  Also, since the time horizon for a private equity firm is usually 3 - 5 years, whereas the markets time horizon is the next quarterly report, the managment can make longer-term plans for the company.  Finally, private equity can bring in better management, (or increase the focus of current management with the threat of firings if current management was paying more attention to their pocketbook than the benefit of their shareholders), which could make the company run better and therefore increase its value.

So I think it is a combination of cheap debt and also the benefits that going private can bring a company.  As to whether or not it is a good deal for the shareholders, that I am not so sure about.  I know that several of my best CAPS picks have now been bought out over the past couple of weeks, and while the short-term pop is nice, having to find a good company with good long-term prospects to replace the company being bought out is a pain.  Now in the real world, some of the companies were bought out by mergers, not buyouts, so I would have gotten stock in the acquiring company to replace the shares of the company that got bought out.  If it is a good company doing the buyout, then I could just hold the shares of the acquiring company and not worry about it.  However, if I think the acquiring company overpaid, or if my good company got bought out by a mediocre company, then I probably need to sell the shares of the acquiring company and look for a new company anyway.  Bottom line, if I wouldn't have bought the acquiring company in the first place, I probably should not keep the shares I get if they buy out a company I did own.

My two cents.  Take care and have a nice day.

Craig

 

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