Tuesday, July 24, 2007

Who Needs PPT's When We Have LBO's?

Sometimes I hit upon a chart so powerful that it literally makes me gasp. This is the case with the following one, taken from the Bank of International Settlements 2007 Annual Report (click to enlarge). The amounts are in trillion dollars and are adjusted for inflation (constant 2005 dollars).

Value of announced LBO's in trillion $US (constant 2005 dollars)

In 2007 thus far, global LBO's are running at a rate 33% higher than 2006. So, it looks as if we may easily surpass $1 trillion in LBO activity this year - assuming the current rate is maintained. Total global market capitalization was $55 trillion as of May 2007; withdrawing almost 2% of market value in one year does wonders for stock prices.

However, there is an absurdity lurking here: private equity and LBO firms are taking dozens of listed companies private, but they are going public themselves. The whole process does not make any sense at all: we are being asked to pay a premium over and above what the LBO firms paid themselves in order to end up owning the same assets. It is little wonder that their IPO's are not faring well, so far.

Add the recent widening of credit spreads which is raising borrowing costs (e.g. the CDX High Yield index has jumped from 275 bp to 455 bp in the past 45 days) and we may already have seen the peak of the LBO activity, which translated into high takeover premiums being placed on stockmarkets.