Thursday, November 23, 2006

Financial murders and acquisitions

A corporate merger mania is sweeping the globe, reminiscent of the frenzy of the late 1990s. That ended in tears and all the signs are that the same will happen this time – only on a larger scale with far-greater consequences for the global economy and millions of jobs. The common denominator about current deals is debt. In 72 hours, beginning on Monday morning, more than $75 billion changed hands as mergers, buyouts and other forms of acquisitions gripped the markets. These deals are in the main being financed by loans and, as a rather concerned Wall Street Journal noted, "some target companies are being loaded with increasingly risky levels of debt in the process". Capitalism’s premier newspaper added: "One important factor behind the year's take-over boom is a well-oiled financial machine: buyout firms searching out prey and raising cash with bonds and loans that are then sold off to investors around the world. Leveraged [debt-financed] buyouts account for some 17 percent of the $3.4 trillion in transactions announced globally so far this year." Even the investment bankers who make mountains of cash out of the deals are getting edgy. Edward Marrinan, a credit strategist at J.P. Morgan Chase, said that companies and their private equity buyers "are pushing the envelope in risk-taking and testing the outer boundaries of the market's tolerances".

Take the largest of this week’s megadeals. That was the Blackstone Group’s record-breaking agreement to buy Equity Office Properties Trust, America’s largest office-building owner and manager, for about $36 billion. Analysts ranks it as the largest "leveraged" buyout in history. It’s the same across the globe. Corporate merger and acquisition activity in Canada hit a record $90.3 billion in the third quarter, according to investment bank Crosbie & Co. The new record came about largely from the $19.9-billion take-over of Canadian nickel giant Inco by Brazil's CVRD. Other big deals included Goldcorp's $9.5-billion US bid for Glamis Gold, Advanced Micro Devices $5.4 billion US take-over of ATI Technologies, and Canadian Natural Resources' $4.6-billion take-over of Anadarko Canada. Eighteen of those deals were "mega-deals," worth $1 billion or more. Five of the 10 largest deals were by foreign interests acquiring Canadian firms.

A significant feature of the spate of acquisition is the role played by private equity firms. These are high-risk, secretive bodies using other people’s money, including pension funds unable to meet their obligations who are in search of quick, high returns. They operate beyond the bounds of financial regulators and will offload and asset strip if that’s what it takes because at heart they are speculators with no real interest in the enterprises they buy. Businesses are being taken private at such a rate that the total value of British companies listed on the stock market reduced by almost £47 billion in the first half of 2006. While interest rates remain relatively low, take-over companies are betting they will be able to service their fast-rising debt loads. You don’t have to be a financial genius to work out that the smallest change in economic conditions or higher interest rates will bring the pack of cards tumbling down. Debts will become unserviceable and that in turn will have a high impact on banks and other financial institutions who put up the money in the first place. Calling in loans will exact a high price in terms of jobs and livelihoods. Global casino capitalism will then look more like a financial Armageddon. Meanwhile, down in the City of London, those who work in mergers and acquisitions are looking forward to the biggest Xmas bonuses ever. They better spend them while there's time.

Paul Feldman, communications editor

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