Economic Commentary:
Does Big Matter?
Jason Singer and Henny Sender report on an important capital market trend today in their WSJ story (“Growing Funds Fuel Buyout Boom: Already Biggest, Blackstone Pool Will Raise Additional $4.4 Billion As Firms Seek Larger Targetsâ€). “Private-equity firms have been on a tear lately, buying up publicly traded businesses with the intention of making them more profitable — frequently by aggressively cutting costs — and then selling them for big gains, either to other companies or to public shareholders via new stock listings. Fifteen out of the top 20 buyouts on record have been announced in the past 18 months, and private-equity firms this year have accounted for 17% of all major mergers and acquisitions.â€
What It Means to the US Economy.
When the supply of publicly traded companies goes down as a result of buyouts, existing public stock markets have fewer member company shares to trade. All supply and demand held constant, this would mean rising equity prices on the remaining public shares. In addition to the effect on public markets, the buyout frenzy is both affected by and in turn influences the bond and debt markets. The debt markets are extending financing to the private-equity firms at a cheaper rate and on more flexible terms, allowing the private-equity firms to offer more. Private-equity firms recently have paid as much as 20% over their acquisition’s current share price. The additional debt capital supplements the huge cache of private cash, and the increase supply, holding demand constant, tends to over inflate both the shares and the value of debt held on the asset sheets of bankers who extend the debt to buy the wildly inflated private shares.
The Big Buy Out Shell Game Will Eventually End Badly.
The combination of really big buyouts of really big public companies will end just like all other speculative frenzies: Badly. But, for whom does the Bell Toll? The giant buyout firms already eyeing takeover targets with stock-market values of $50 billion or more. What happens to the U. S. economy when the really big companies get sliced and diced by the biggest firms.
What is America’s Greatest Economic Strength?
“The Next Job Outsourced to India Could Be Yours,†writes Mark Gilbert, in Bloomberg today. And this is the really bad economic effect on the U. S. economy.
“Anyone who believes the U.S. and Europe have some kind of monopoly on intellect is cruising for a bruising,†writes Gilbert. He cites the writing of Andy Kessler on a type of polly-annish thinking about American innovation and ingenuity.
“We Think, They Sweat,” wrote Andy Kessler in an article on Asian manufacturing and the U.S. trade deficit for the Wall Street Journal two years ago. If “they” start thinking for us as well, maybe we are the ones who should be sweating.â€
Well, exactly who or what entity in America does the thinking, and exactly who or what group in America does the sweating?
America’s greatest economic strength is the individual freedom to think and sweat freely.
The Really Big Buy Outs Affect American Capacity to Innovate.
As Clayton Christensen, of Harvard University, has extensively documented, most of America’s economic and technological ingenuity resides precisely in the corporations now targeted for take-overs. Does any one out there believe that the corporate raiders care a damn about the economic effect of eviscerating America’s innovative ability after they get control of the company and load it up with debt?
Who Seeks The Smaller Deals?
If America and its 50 little state cousins actually had an economic strategy, it would focus attention on the smaller deals, and make sure that they get done right. While the big firm buyouts will affect stock market prices in the near term, the future economic strength of the country resides in the ability of little firms to prosper.
Who is it in America that is seeking the prosperity of the little deals?
October 30th, 2006 by 
Tom Vass
No Comments »
