Phorgy Phynance

Archive for the ‘M&A’ Category

Real money M&A

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Way way back a long time ago (in August), I clarified a semantic issue regarding one of my market forecasts (more like voodoo analysis) I made on July 24 here:

Non-Leveraged M&As versus LBOs

Here is a snippet:

But regarding that quote above from my last post, there is something I wanted to clarify. Particular the chain of events that I outlined, i.e.

subprime CDO imploding -> HY repricing -> CLO slowing -> LBO stopping -> private equity choking -> equities tanking -> M&A increasing -> ???

At the time I wrote that, we were only on step two, i.e. subprime had imploded and HY had repriced (a bit). I think their is still long way down to go for credit, but at the time I wrote that CLOs hadn’t been hit yet, LBOs were not on the radar screen (of most anyway), and the idea that private equity was in trouble seemed ludicrous. How about now?

Now, everything has occurred except “M&A increasing”. At the time I wrote that I was distinguishing LBOs from M&A, but have since learned that many people include LBOs under the M&A umbrella, so I thought I would clarify what I meant by that last item before the “???”.

LBO activity was driven by (at least) two factors: easy credit and value in acquiring companies. The first factor is now gone, which is why private equity is hurting. The second factor remains. Easy credit made it difficult for real-money people to take advantage of the value in acquiring companies because of competition from private equity. With easy credit gone and private equity struggling to get LBOs done, now people/corporations with real money on hand can take advantage of the situation.

By “M&A increasing” I meant that mergers and acquisitions that are not dependent on leverage, i.e. by people/corporations with “real money”, would increase. This, I thought, would prop up equities for a while longer. For example, on July 25, I said:

Since I expect LBO activiate to be significantly hampered, if not halted, and since there is value in stripping some of the companies, I expect more M&A activity to replace LBO activity.

I meant “non-leveraged” M&A. So watch for this. The first sign of this happening that I’ve seen comes from Bloomberg in regard to Warren Buffett. Certainly a “real money” guy.

Buffett’s $46 Billion in Cash Could Buy Kohl’s, Nucor

Here’s an excerpt:

Berkshire Hathaway Inc. Chairman Warren Buffett is ready to spend $40 billion to $60 billion on an acquisition, and his opportunities are expanding as stocks fall and leveraged buyouts dry up.

Shares of health insurers, steelmakers and department stores are as much as 22 percent cheaper than in May, when Buffett said he would “figure out a way” to come up with $60 billion for the right deal. WellPoint Inc., Nucor Corp., Kohl’s Corp. and dozens more companies are now closer to meeting his investment criteria.

It seems we are approaching the faintest regions of that earlier “prediction”. Real money seems to be stepping up and it is not necessarily from the obvious candidates. Watch out for sovereign wealth funds to keep things propped up for a while longer.

A bit dated due to my reduced blogging pace:

Gulf Counters M&A Slowdown With $25 Billion of Deals

and a bit more recent via a guest appearance on Brad Setser’s blog

Soverign wealth funds

Michael Pettis seems to think sovereign wealth funds can prop up the market for years to come. I tend to agree with him (but not sure if the time span is years… or months). By the way, as a sidenote, when I asked someone at work about the possible positive influence of sovereign wealth funds on structured finance, I was shot down pretty publicly. It was brutal. Friendly new colleagues seemed to get a kick out of it and still rib me about it to this day. Pick on the new guy! 🙂 Oh well. I’ve decided to keep my mouth shut about markets and economies during high-profile meetings. After all, I’m not an economist or even a market analyst. I’m a quant. As a quant, I am quite competent and should just stick with what I know when it comes to my actual career. On the “quant” front, however, I’ve recently developed some massively cool technique for rapidly producing analytics, e.g. OAS, OA duration, etc for a large pool of securities. In the “privacy” of my own blog, I can say whatever I want though 😉

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Written by Eric

September 23, 2007 at 11:28 pm

Non-Leveraged M&As versus LBOs

with one comment

Here is something I posted to NP back on July 24:

[From rrp:] I guess the point is that credit spreads are out and this validates your belief that HY Credit spreads are in trouble and ergo private equity is in trouble. I am not sure this is the case. Credit spreads are just one function of how a transaction is going to look.

Hi rrp,

I think the link between HY and private equity is via the CLO market. Spreads widening in HY will make getting CLOs done more difficult. That marks the end of LBO activity and trouble for private equity.

From someone sitting on the sidelines, it seems pretty clear that private equity is about to eat it. Keep in mind that I’m currently on “garden leave” and am sitting in front of my computer (in my boxers… too much information?) reading finance blogs, watching BBG online TV, and reading web news all day. Kind of artificial knowledge, but so far I think I’m getting decent information. For example, here is an article that enunciates the CLO thing more clearly than I could:

After price spike, debt market pros see calm before the storm in corporate leveraged loans

Here’s the chain I’m currently contemplating:

subprime CDO imploding -> HY repricing -> CLO slowing -> LBO stopping -> private equity choking -> equities tanking -> M&A increasing -> ???

I’m also watching petrodollars migrating away from USD, e.g. Iran forcing Japan to purchase oil in Yen, Russia paying in Rubles, parts of Europe paying in EUR. Oil bourse? Not to mention sovereign reserves diversifying away from USD.

I want to buy gold…

PS: I’m blabbering in an attempt to maximize the learning experience from watching the events unfold. I hope I’m not irritating the pros Beer

Edit: Updated icon.

Edit^2: Plus, you gotta love Bill Gross.

Enough is Enough

Edit^3: Speaking of petrodollars migrating away from USD…this just appeared…

Kuwait Strengthens Dinar for Second Time as Dollar Weakens

In general, I love the guys at NP. Super smart and surprisingly patient with the likes of me. However, it’s becoming clear that I’ve developed a few vocal (and some not-so-vocal) critics over there. That doesn’t bother me too much. The only way to go through life and not have critics is to not have any opinions. Once you voice your opinion on something people feel strongly about, you’re bound to step on a few nerves. So be it.

Since I do value the community there, i.e. I even admire my critics, I’ll probably express my opinions here rather than there for a while. At least until the current bloodbath in the markets is over (which I don’t think will be any time soon). The latest criticisms are so irrational that I don’t even know how to respond, so I won’t. Not there anyway. I’ll just assume that people are particularly grumpy because they must be on the wrong side of the credit markets and seeing their bonuses disappear, which certainly isn’t my fault.

But regarding that quote above from my last post, there is something I wanted to clarify. Particular the chain of events that I outlined, i.e.

subprime CDO imploding -> HY repricing -> CLO slowing -> LBO stopping -> private equity choking -> equities tanking -> M&A increasing -> ???

At the time I wrote that, we were only on step two, i.e. subprime had imploded and HY had repriced (a bit). I think their is still long way down to go for credit, but at the time I wrote that CLOs hadn’t been hit yet, LBOs were not on the radar screen (of most anyway), and the idea that private equity was in trouble seemed ludicrous. How about now?

Now, everything has occurred except “M&A increasing”. At the time I wrote that I was distinguishing LBOs from M&A, but have since learned that many people include LBOs under the M&A umbrella, so I thought I would clarify what I meant by that last item before the “???”.

LBO activity was driven by (at least) two factors: easy credit and value in acquiring companies. The first factor is now gone, which is why private equity is hurting. The second factor remains. Easy credit made it difficult for real-money people to take advantage of the value in acquiring companies because of competition from private equity. With easy credit gone and private equity struggling to get LBOs done, now people/corporations with real money on hand can take advantage of the situation.

By “M&A increasing” I meant that mergers and acquisitions that are not dependent on leverage, i.e. by people/corporations with “real money”, would increase. This, I thought, would prop up equities for a while longer. For example, on July 25, I said:

Since I expect LBO activiate to be significantly hampered, if not halted, and since there is value in stripping some of the companies, I expect more M&A activity to replace LBO activity.

I meant “non-leveraged” M&A. So watch for this. The first sign of this happening that I’ve seen comes from Bloomberg in regard to Warren Buffett. Certainly a “real money” guy.

Buffett’s $46 Billion in Cash Could Buy Kohl’s, Nucor

Here’s an excerpt:

Berkshire Hathaway Inc. Chairman Warren Buffett is ready to spend $40 billion to $60 billion on an acquisition, and his opportunities are expanding as stocks fall and leveraged buyouts dry up.

Shares of health insurers, steelmakers and department stores are as much as 22 percent cheaper than in May, when Buffett said he would “figure out a way” to come up with $60 billion for the right deal. WellPoint Inc., Nucor Corp., Kohl’s Corp. and dozens more companies are now closer to meeting his investment criteria.

Written by Eric

August 5, 2007 at 9:39 am

Posted in LBO, M&A