Posted by: Aaron Pressman on September 28, 2007
There’s some intellectual laziness floating through the world of finance lately. Everyone knows that the subprime mortgage mess has reduced demand from investors and lenders for riskier stuff. And everyone knows some leveraged buyout deals are in trouble. Harman International’s (Symbol: HAR) deal fell apart last week and the much bigger, $25 billion bid for Sallie Mae (SLM) looks headed that way as well. So must be A caused B, no?
The answer is no, not really. In both the case of Harman and Sallie Mae, the companies’ own fundamentals were deteriorating and the buyers likely would have wanted out even before the great credit crunch of ‘07. The same is true of many of the other troubled buyouts. The $6 billion takeover of Affiliated Computer Systems (ACS) was a hairy and contentious mess from the get-go as the company’s board resisted a bid to go private led by its own chairman, Darwin Deason. Database manager Acxiom is suffering directly from the real estate downturn, where many of its customers do business.
In a lot of other cases, what you’re hearing is the usual negotiating process played out in public. Banks holding huge bridge loans they need to get off their books want to sell the debt at as close to 100 cents on the dollar as possible. Investors considering those loans want to get them as cheaply as they can. In the fight over Archstone-Smith Trust, an apartment REIT going private for $22 billion, bankers want 99 cents on the dollar and potential investors want a bigger discount. With billions and billions pouring into new funds expressly created to scoop up bargain priced buyout debt, there’s little doubt that most of these deals will get done. It’s just a question of price. The much-questioned First Data deal is looking much healthier now with banks suddenly offering the debt at 96 and 97 cents on the dollar.
Another way to measure what’s really going on is to examine the stock prices of major takeover targets. If a stock is trading well below the takeover price, it’s a sign the market doesn’t have much confidence in the deal. But most of the biggest pending deals are trading at very tight spreads, a few percentage points. If you check over at MergingInvesting.com, you can follow spreads on all pending deals. The $32 billion takeover of Texas utility giant TXU (TXU) has a spread of 1.3% and the $25 billion purchase of wireless telecommunications carrier Alltel (AT) a 2.6% spread. Spreads on the $26 billion deal for Hilton Hotels (HLT) and $17 billion deal for Harrah’s Entertainment (HET) are also minuscule.