If Bloomberg weren’t shilling for the Fed/Wall Street bubble economy— then Reuters, the WSJ and countless others would pick up the slack. But the article below by Bloomberg’s Jeffrey McCracken needs no pointers from Rupert Murdoch’s Cool-Aid drinkers.
Noting that we have at last gotten back to a trillion dollar global M&A quarter and have thereby reached the peak financial engineering insanity of Q3 2007, McCracken spends the bulk of the article quoting a Wall Street M&A dealster explaining why “this time is different”.
Exactly which turnip truck did McCracken ride down to Wall Street? Of course, this time is different. Its always different!
Here’s the line from McCracken’s M&A peddler. It amounts to the proposition that last time it got out of hand because the mountains of cheap debt were used to fund going private transaction—that is, LBO’s. This time, by contrast, corporate America is not bothering to claim “hidden” value which can only be unlocked under private ownership. They are going to do it directly by investing in “compelling” growth plans that have a “strategic foundation” in their own public enterprises.
In truth, this time they are just loading up the corporate wagons with mountains of debt to fund an alternative form of financial engineering—that is, cash M&A deals and share buybacks. So McCracken’s source didn’t bother to acknowledge that it doesn’t take monster LBOs to have a debt spree in today’s Wall Street casino:
“The last time we had this kind of run rate, back in 2007, a good amount of those deals involved private-equity buyers and the transactions were highly leveraged,” said Andrew Bednar, M&A partner at Perella Weinberg Partners LP in New York. “These more recent deals are on a better foundation, more compelling and more strategic.”
Not on your life! Here’s the point about the corporate debt spree. At the peak of the prior cycle in Q4 2007 and right before the Wall Street meltdown, total non-financial business debt outstanding was $11 trillion. But as of Q1 2014 that giant figure had exploded by 26% to $13.9 trillion.
What the Bernanke/Yellen experiment in ZIRP and QE has actually produced, therefore, is one of the greatest 5-year sprees of corporate debt issuance in American history—nearly $3 trillion worth. Not only are today’s Wall Street journalistic shills totally unaware of this fact, but they have actually embraced its opposite—the hoary notion that corporate America is drowning in cash:
Instead, confident chief executives and shareholders who are rewarding risk-taking have companies tapping more than $4 trillion of cash on corporate balance sheets and low interest rates to fund deals.
In fact, cash on the balance sheet of US non-financial business has risen from $2.7 trillion in Q4 2007 to $3.0 trillion in Q1 2014. Not only is this a rounding error in the scheme of things and dwarfed by the massive simultaneous build-up of debt obligations (i.e. 10X more), but it is being used to make a completely invalid point.
It is not an upwelling of CEO “confidence” that is causing “surplus cash” to be put to work in M&A deals. What this modest gain represents is simply cash that is being hoarded because the Fed has made the carry cost of debt so cheap that corporations cannot restrain themselves from loading up on gifts from the Eccles Building.
In truth, nearly all the massive corporate borrowing is going to the same place is did last time. Namely, to the Wall Street gamblers and hedge funds who chase “merger Monday” stocks and shares being boosted by record stock buybacks. But such uses of debt do not lead to economic growth; they simply result in the inflation of existing stock prices and windfalls to the adept gamblers who buy on leverage, trade on rumors and move along quickly to the next allegedly “undervalued” play.
But here are the real facts of the matter. Virtually none of this massive increase in business debt since the last crisis has gone into productive investment in plant and equipment. We are now 77 months on from the last peak in December 2007, yet real investment in business plant and equipment is still $70 billion or 5% lower than before the crisis!
Needless to say, this has never happened before. In every cycle going back to the 1950s, business investment had fully recovered by the 77 month mark and was higher by double digit amounts. But then, in none of those earlier cycles was the Fed run by out-and-out Keynesian money printers determined to gift the 1% with “wealth effects” under the misbegotten notion that this would goose job growth and the main street economy.
So, yes, ironically, this time is different. The Fed is so far off the deep-end that today’s trillion dollar M&A quarter surely represents a ticking time bomb that will dwarf the LBO blow-up last time around.
By Jeffrey McCracken at Bloomberg News
The $1 trillion M&A quarter, not seen since before the global financial crisis, is back.
Global deal volume this quarter is $992 billion, according to data compiled by Bloomberg that includes pending, completed and proposed transactions. That number puts this three-month period on pace to be the biggest for M&A since the third quarter of 2007 — the best year ever for deals — before Lehman Brothers Holdings Inc.’s 2008 bankruptcy gave Wall Street a near-death experience.
Unlike 2007, the tail end of history’s biggest leveraged buyout boom, this time the private-equity buyers are sitting things out. Instead, confident chief executives and shareholders who are rewarding risk-taking have companies tapping more than $4 trillion of cash on corporate balance sheets and low interest rates to fund deals.
“The last time we had this kind of run rate, back in 2007, a good amount of those deals involved private-equity buyers and the transactions were highly leveraged,” said Andrew Bednar, M&A partner at Perella Weinberg Partners LP in New York. “These more recent deals are on a better foundation, more compelling and more strategic.”
There were three $1 trillion-plus quarters in 2007 — a year in which total M&A hit $4.8 trillion. Since then, the quarterly average has been about $650 billion, for annual volume of around $2.6 trillion. According to data compiled by Bloomberg going back 12 years, the $1 trillion in quarterly value was only breached six times, all in 2006 and 2007.
Ill-Fated
The 2007 rush marked a time when deals of questionable value were completed. The biggest was the $48 billion buyout of Energy Future Holdings Corp., formerly known as TXU, the Texas power company taken private in the biggest ever leveraged buyout. It filed for bankruptcy in April. Also announced in 2007 was the $20 billion buyout of Lyondell Chemical Co. and the Tribune Co. buyout led by real estate developer Sam Zell for more than $13 billion including debt. Both filed for bankruptcy.
Lehman Brothers and a partner bought apartment-complex company Archstone Inc. for more than $20 billion that year — to sell it later at about a $6 billion loss.
In contrast, global deal volume this year can’t be attributed to private-equity deals. Instead, the year so far has been characterized by large corporate hook-ups, often cross-border in nature, many of which had been contemplated or discussed in previous years.
M&A volume in 2014 has reached $1.8 trillion.
AT&T, Lafarge
The driver, dramatically so, is corporate purchases of at least $10 billion. The largest announced transaction of the quarter was AT&T Inc.’s purchase of DirecTV for about $67 billion, including debt. There was also the merger of Lafarge SA with Holcim Ltd., the biggest cement deal ever, and General Electric Co.’s proposed $17.1 billion purchase of Alstom SA’s energy assets, which would be its largest acquisition.
Additionally, a slew of large pharmaceutical deals has been announced since April, including Valeant Pharmaceuticals International Inc.’s $54 billion offer for Allergan Inc.; Bayer AG’s $14.2 billion purchase of Merck & Co.’s consumer-health products business; and Novartis AG’s $14.5 billion acquisition of GlaxoSmithKline Plc’s oncology unit.
This quarter’s numbers are skewed slightly by Pfizer Inc.’s so-far stifled effort to acquire AstraZeneca Plc for $117 billion, which is included in the data compiled by Bloomberg. Even without it, the second quarter of 2014 is still the strongest since before Lehman Brothers failed — with three weeks left in the period.
CEO Confidence
The large deals compensate for a notable drop in the actual number of deals. So far this quarter there have been 5,626 transactions. In 2007, each $1 trillion quarter required more than 9,000 deals to hit that figure.
A different mindset in the boardroom is at play. The CEO Confidence Index — a measure of confidence in the economy a year from now — registered at 6.09 in April, according to Chief Executive Magazine. That’s near where it stood in late 2006 and double the level of early 2009. The index has been on a steady increase for three years.
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