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Wall Street Blocked By Buyout Debt
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The stock markets could also suffer because private-equity deals almost always boost the share prices of companies that are being acquired. What's more, after owning a firm for several years, a buyout firm often recoups its investment by putting the company back on the public stock markets. Last year, private equity was responsible for 44 percent of all initial public offerings, according to data collected by Dealogic, an independent research firm. In general the stocks in those offerings did much better than other IPOs, the researcher said.
The credit crunch has already scuttled major deals and called others into question. This week, the $6.8 billion takeover of Alliance Data Systems collapsed after its buyer, private-equity giant Blackstone Group, told the firm it was backing out. The banks underwriting that deal have been unable to find backing for $3 billion worth of financing. ADS sued Blackstone yesterday in an attempt to force it to complete the acquisition.
Two of the first failed deals involved Washington area firms. The $8 billion buyout of electronics maker Harman International unraveled days before the $25.3 billion acquisition of student lender Sallie Mae. More than a dozen others ran into trouble as private-equity firms endured bouts of buyers' remorse.
The shares of several firms that had agreed to takeovers have dropped significantly below their acquisition price, a sign that investors are skeptical that the buyouts will go through. Thomas H. Lee Partners and Bain Capital Partners had agreed to pay $37.60 a share for Clear Channel in 2006, for instance. But yesterday the stock closed at $29.04, more than 22 percent lower than the buyout price.
Treasury officials have proposed several measures to shore up confidence in the credit markets, including a mortgage relief plan that may lead to more mortgage lending. The Fed also has been cutting rates aggressively, reducing a key short-term lending rate yesterday by 50 basis points barely a week after an even steeper cut.
U.S. Treasury Assistant Secretary Anthony Ryan said this week there are signs these moves are starting to work. As evidence, he pointed to the asset-backed commercial paper market, which is beginning to stir after being shut down for months.
He added that it may take time for other segments of the credit markets to return to normal.
"This is certainly not an 'all-clear' signal, but perhaps the beginning of the transition to an improved state," Ryan said at a financial conference in New York. "This process will take more time."
