[A-List] FT: The end of LBOs (?)

[Sabri Oncu <sabri_oncu@xxxxxxxxx>]

FT.com
The end of LBOs
Friday July 27, 2:40 pm ET 

If you believe the bears, a new "asset class" is being exposed as just another
management and financing technique, and a dubious one at that. But would a
freeze in leveraged buy-outs be as bad for stock markets as some fear? The case
that equities price in the hope of LBOs across the board is actually pretty
weak.

Private Equity Intelligence provides an estimate for "dry powder" - committed
equity as yet unspent - for buy-out funds. To this can be added the likely
capital raised by private equity outfits on the road now to produce a total of
$548bn. It is reasonable to assume that this money is spent on takeovers that
are three-quarters debt-financed and occur at a one-third premium to the stock
market price.

On this basis the total LBO takeover premium due to be paid to stock market
investors is $506bn. This is only 2 per cent of North American and European
market capitalisation. Of course, this might be concentrated in specific areas
- smaller capitalisation stocks for example - and in certain countries such as
the UK. But if investors are accurately discounting the immediate pipeline of
activity, anticipated LBO takeover premiums are not heavily distorting equity
prices in aggregate.

Might stock markets instead be discounting a much longer golden era of near
indiscriminate buy-outs? This is what fans of private equity predict: the
underwriters' research on Fortress Group, for example, is comically bullish, in
one case forecasting assets under management of $23bn top $260bn by 2016.

Yet it is doubtful that public equity investors accept this kind of "new
paradigm" argument. If they believed the conditions were ripe for a sustained,
massive rise in leverage, big quoted companies would not have prudent balance
sheets and be valued on earnings multiples that imply profits may be near a
cyclical peak. Public equities most likely reflect the view that the LBO boom
is a cyclical phenomenon of finite duration and questionable wisdom.


       
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