The Eternal Pendulum: e.g. Buyouts

"When Dollar General Corp. received a nearly $7 billion buyout offer in early March, investors scooped up shares in other discount retailers.

"And when SLM Corp., the student-loan provider better known as Sallie Mae, announced in April that it would be bought out for $25 billion, bonds issued by Countrywide Financial Corp. and CIT Group Inc. sold off on fears that they too could become takeout targets. Bond holders typically disdain buyouts because they add new debt to companies, potentially straining their finances and credit standing.

"For the past year, similar jumps and falls have occurred in sectors ranging from consumer-goods companies to industrial groups to technology companies as investors tried to game which companies would get taken out next in the great private-equity-led buyout wave. Once a company became a buyout target, investors would look to peers, screening them in a search for companies with high, stable cash flows and low debt levels as potential candidates for a buyout. They would then buy these stocks, or sell their bonds, in the hope of an acquisition-led payoff.

"Now, investors are wondering if the game of buyout bingo will soon come to an end as the investors who purchase the debt that fuels such takeovers begin to balk at some of the riskier deals...

"These debt-market problems could render moot the seemingly endless stream of lists that have been generated in a bid to identify companies that could be the next takeout target…

"The premise for much of the chatter was that no company, no matter how big, was off limits from a potential buyout because of the seemingly endless appetite for the debt funding these deals. With the use of borrowed money, or leverage, buyout firms had been able to dramatically increase the amount they could pay for a company.

"That's changing. 'I know there's been talk about $100 billion and $150 billion deal sizes, but that's probably not on the table anymore,' said Gregory Peters, head of credit strategy at Morgan Stanley. From now on, 'buying a company at higher leverage multiples and expecting to easily finance it through the debt markets is going to be much more heroic…'

"To be sure, investors aren't expecting the buyout boom to end outright. Nor will stocks that have been pushed up by buyout speculation likely sell-off overnight, strategists said."

(“Game of Buyout Bingo May Be Ending; Investors Stop Guessing Which Target's Peer Will Be Next Player Up.” David Reilly. Wall Street Journal: June 28, 2007. pg. C.1)