Dancing on Bubbles In a Takeover Stampede

Surge of Private Equity Cash and Nymex IPO Ring a Warning Bell

NEW YORK They say on Wall Street that no one rings a bell telling you that it's time to get out. But if you've got any sense -- or any sense of financial history -- two recent transactions might bring a faint ringing to your ears.

The two cases in point are Sunday's $36 billion sale of Equity Office Properties Trust to Blackstone Group, the biggest going-private transaction in history, and the surge following last week's initial public offering of Nymex Holdings, the parent company of the New York Mercantile Exchange.

Wall Street will tout these deals as a sign of robust confidence in the financial markets. To me, however, they're froth, and possibly a sign of financial lunacy coming back into the markets less than seven years after the stock bubble burst. A closer look at these deals will show you why.

We'll do Nymex first, because it's simpler. On Friday, its first day of trading as a public company, the stock closed at $132.99, more than double its initial public offering price of $59. It had traded as high as $150. (It closed Monday at $130.27.) Anytime I see an IPO more than double in a day, I shake my head -- and I think of the Internet and telecom and tech stock madness that came upon the market in the late 1990s. We all know how that ended.

I have no idea of what Nymex's true economic value is -- but it's hard to believe that the selling shareholders were stupid enough to underprice the issue by more than 50 percent, as the stock market seems to think.

Publicly traded financial exchanges are hot stocks -- you've got to love the irony of exchanges being a better investment than what trades on them -- because the industry is consolidating. But even so, the trading pattern of Nymex shares makes me skittish. It should make you skittish, too.

Then there's the sale of Equity Office Properties Trust, one of the nation's biggest commercial property owners. Blackstone's investors are paying $48.50 a share, or about $20 billion, for its stock, and assuming some $16 billion of debt. That would make Equity Office the biggest going-private sale in history, topping the $31 billion fetched by the 1989 "Barbarians at the Gate" buyout of RJR Nabisco, and the recently completed $33 billion buyout of HCA, the big hospital company.

What makes me really pay attention to the Equity Office deal isn't so much its size but the fact that one of the shrewdest real estate guys and deal mavens in the world is selling: Sam Zell, Equity Office's founder and chairman.

Zell is one of the great characters in the investment world. He's profane and funny and self-mocking enough to call himself the Gravedancer: Before moving to the big leagues and becoming respectable, he specialized in buying seemingly dead properties at rock-bottom prices, rehabilitating them and selling them at huge profits.

To be sure, the guys from Blackstone aren't exactly chopped liver. The firm is big in real estate, including this summer's $5.6 billion purchase of CarrAmerica Realty. But when the Gravedancer sells, you wonder if it's really a good time for you to be buying.

That's especially true in this market, where you can see bubbles forming -- not in the overall stock market, but in what are called "alternative investment" markets. The Equity Office deal actually combines two of these markets: commercial real estate and private equity. (Other alternatives include hedge funds and commodities.)

You can never prove that something's a bubble until after it bursts -- but most people's favorite candidate for bubblehood among alternatives is commercial property. The availability of ultra-cheap, ultra-liberal financing has driven values sky-high. The Gravedancer isn't perfect, but when he sells, what he's selling generally isn't underpriced.