Wednesday, November 22, 2006

Credit: it's what's fueling deals

Are credit and ample liquidity (aka cheap money) the driving factors behind the recent spate of merger and buyout deals?

We asked this question back in March in a post entitled "Mergers and global liquidity". All the usual reasons for doing deals still applied (savings, "synergies", empire building, etc.), but it seemed that the recent upsurge in M&A and buyout deals has been fueled by something else: in a word, credit.

Well now comes news that the most recent deal binge has, in fact, been financed through easy and cheap debt.

In yesterday's Financial Times (November 21, 2006 print edition), John Authers looked at the deals done in the previous 24 hour period and asked, "where did yesterday's rash of deals come from? The answer is the credit market".

Authers went on to say that because of low borrowing costs, it is now cheaper for companies to finance themselves more cheaply through debt, rather than equity. This, being opposite from the usual case where tapping the equity market is seen as a more favorable option.

A similar point was made by FT writer Christopher Brown-Humes earlier in the month. See his November 4 article, "Debt and equity markets point to continuing boom in M&A" for more.

These points were echoed in John Politi's piece, "$75bn in 24 hours". He noted that deals announced in the recent 24 hour period were driven partly by "the protracted availability of inexpensive debt to finance takeovers".

We are seeing a rush of mergers and private equity deals financed largely through easily available credit and debt. As Richard Russell recently noted, this huge pool of money may not be easily available to you and me, but it is there for the big players constructing the deals.