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King and Bernanke rescue mega takeovers

Robert Peston | 10:18 UK time, Friday, 5 February 2010

A couple of years ago, when I was making my documentary "The Greed Game," Stephen Schwarzman - the legendary founder of the private equity firm Blackstone - said that he relishes downturns in markets and economies.

No great mystery why: the woes of others throw up opportunities for buyout firms like Blackstone to acquire businesses and assets at keener prices.

That said, at the time Mr Schwarzman probably under-estimated the extent to which debt finance for firms like his would dry up for a period

The recovery at big private equity firms like Blackstone has been slower and harder than some would have expected.

Because for much of the past couple of years, the value of the assets on their books has fallen and the once-bitten banks have been reluctant to lend to them for takeovers.

But buyouts are coming back. At Davos, I was chatting to a private-equity pioneer almost as prominent as Mr Schwarzman. And this normally lugubrious character almost cracked a smile.

The leading firms can borrow again: less than before; and on lower multiples of the target companies' respective cash flows.

But although poor Guy Hands of Terra Firma may be floundering around in EMI's $5bn of debt, things are looking up for private equity in general.

Quite a few firms bought by private equity in the boom years - the likes of the leisure conglomerate, Merlin - will be sold on to the stock market in the coming few weeks, unless the recent wobbles in stock markets become something a good deal worse and investors' appetite evaporates.

That said, the real boom in takeovers is coming from a more traditional source.

Giant companies - such as Warren Buffett's Berkshire Hathaway and the food group Kraft - have been the great beneficiaries of savage reductions in interest rates and the creation of oodles of new money by the US Federal Reserve, the Bank of England, and the European Central Bank.

In rescuing the global economy, the western central banks have rescued the traditional mega takeover.

I'm not sure whether King and Bernanke would describe this as collateral damage or just one of those things.

But they have accelerated the corporate Darwinian process of reinforcing the market clout of the world's biggest and strongest businesses.

Because huge companies are currently able to raise record-breaking sums at very low interest rates by selling bonds to investors.

Kraft, for example, yesterday raised $9.5bn to finance its takeover of Cadbury.

And Berkshire Hathaway sold $8bn of notes to fund its acquisition of the railway group, Burlington Northern Santa Fe.

These are both among the 15 biggest corporate bond deals ever.

Kraft and BH may be paying a smidgeon more for this money than would have been the case if there hadn't mean a minor global tremor caused by the collapse in confidence in the ability of Greece to service its debt.

But with the interest payable on the different tranches at low to middling single-digit interest rates, this is cheap debt - cheap enough to finance the purchase of substantial companies like Cadbury with stable profits

Here's a fascinating statistic: Bloomberg has calculated that US companies are spending the highest portion of bond-sale proceeds in more than a decade - or around 70 per cent - on takeovers and expansion.

Where the US leads, the UK usually follows.

Which means that so long as global markets don't seriously crack as the result of growing concerns about heavily indebted countries' ability to pay their way - and that is a big if - then the Fed and the Bank of England may have fuelled a return to boom boom in takeovers.


  • Comment number 1.

    So, are you telling me the supply of condiments will be from a 'too big to fail'?

  • Comment number 2.

    So we've moved from the governments printing money into companies printing money instead?

  • Comment number 3.

    Exactly - the slashing of interest rates to such low levels only benefits the big companies, who can issue bonds. Small and medium sized companies lose out due to the restriction of credit.

    If anything, such low interest rates exacerbate the credit crunch, as the carry trade takes money from low interest rate countries to invest in high interest rate countries.

  • Comment number 4.

    You could be very close to the truth. It would appear that the BoE have another £50bn to spend via Treasury Bills on private assets. See Francesca Jones on Stephanie's blog. Is this to be spent on bank bonds backed by the Credit Guarantee Scheme as a means to help the banks again to refinance their wholesale funding. Will it be used to buy commercial paper/bonds to refinance big FTSE corportae bank debt ( another Bail-out).Will it be used to buy Residential Mortgage Backed Securities? Will it be used to fund private equity "big-kill" deals?Isnt it time we have a say in what the BoE are doing with our money and who benefits? Why should this be left to faceless bureaucrats?

    Treasury Bills means taxpayers' borrowing - we pay the interest.

  • Comment number 5.

    Just look where the IMF is going - unbelievable!

  • Comment number 6.

    You are too optimistic.

    In EU, many of the countries (led by Germany and France) are opposed to the whole concept of private equity takeovers and are doing their best to make running such a venture too difficult. As was pointed out by the financial law panel in the last couple of days, the latest proposed directives from EU are incompetent but there is a real risk that they will get passed not because of good economics but because certain countries want to punish "anglo-saxon" free market economics and the city of London.

    Many companies still have unrealistic expectations of what they are worth. Pets at Home was sold on a EBITDA multiple of 11 which is what many owners are basing their valuations on. With a lower level of borrowing, multiple will have to go down, but what board of a public company will accept a bid in the 7-8x EBITDA range?

    Given the amount of money that govts around the world need to borrow is there not a real risk that they will starve the private sector by mopping up the lending capacity

  • Comment number 7.

    What ever happened to plain simple organic growth?

    (...probably too much like hard work!)

  • Comment number 8.

    Oh woe!

    Cheap finance for M&A activity is fine - up to a point.

    From 2004 to 2007 this activity was about 20% of GDP for the UK.

    The problems are that this activity causes a flurry of reflection in the stock market but does not increase productivity at all.

    Many mergers simply do not work either. Corporate cultures do not mix and where there is like activity in the core businesses, the two camps vie with each other for dominance before staff from one or other camp are moved on.

    The bottom line benefits fairly quickly. The share price reflects the bottom line benefits. The back office constipation and plans to get the merger integrated throughout the business takes more than a year. The lack of prodictivity shows in year 3 and beyond.

    All in all M&A activity has to be continuous for there not to be a catch-up - a big bang, no less - when the activity ceases and brutal reality comes to the fore.

    M&A activity is dangerous if we depend on it to have a bullish outlook without looking at all other activities and the realities of productivity and turnover, which give us a better picture of the financial health - actually like looking at a balance sheet as opposed to a profit and loss account to get the truth of the situation.

  • Comment number 9.

    Robert, I think your tense is wrong about 'crack': 'have cracked' is about right. Overnight Asia took a mauling and this am the FTSE is sliding again.
    I think there's also a qualitative dimension missing from your comment - ie, is the triumph of mega-companies a good thing? For customer service and social life-balance, I'd say no. Are takeovers a good thing? For corporate culture and shareholder value, the answer is no again: 53% of all M&A destroys shareholder value. (The Economist)
    My belief has always been that just as one thinks the power of an econo-fiscal vehicle is unassailable,it collapses. (eg Lehman)
    Even l'anglo-saxoniste Sarkozy was (at Davos) placing (rightly) doubt upon the obsession with Bourse mania and greedy short-term shareholder value equations.
    Buffet thought the Kraft/Cadbury deal made no sense,and I agree: what on earth is the rationale for a bigger chocolate company?
    The idea that the future is globalist doesn't make sense, and is based purely on the extrapolation forward of a straight line. This is the sort of thinking that got us into this hole in the first place.

  • Comment number 10.

    So, in summary, we have flooded the system with liquidity with the aim of keeping the economy going while we sort out the over indebtedness of both the corporate and consumer sectors and deflate the resulting asset bubbles in an orderly manner.
    But we have so calmed the panic that UK housebuyers and large corporation, who can get the finance, are actually actively taking on more debt and reflating the asset bubbles. Further more the takeovers will probably result in the loss of jobs.Meanwhile sound smaller companies are being drven out of business by lack access to working capital as the banks rebuild there balance sheets.
    At this point I would be happy to be proved wrong about the above analysis as I am begining to develop a desire to role up in a ball and whimper.

  • Comment number 11.

    So the biggest companies can take advantage of the record-low interest rates whilst small companies are being squeezed out and consumers are having credit card interest rates increased.

    More (I guess) unforseen negative consequence of the powers-that-be meddling with markets: their arrogance is breath-taking.

    Remember the film 'Wargames' where the computer played out endless scenarios of nuclear war to determine the likely winner? I can see this going the same way. What's the odds on the final being contested between Berkshire Hathaway and Goldman Sachs?

  • Comment number 12.


    This is lightweight analysis, it is not a story, it is nothing new, it is basically nothing at all - just tittle tattle.

    Your final tit-bit: "Here's a fascinating statistic: Bloomberg has calculated that US companies are spending the highest portion of bond-sale proceeds in more than a decade - or around 70 per cent - on takeovers and expansion.".

    One would except that to be the case due to: (i) companies having over capitalized themselves with equity over recent difficult years and (ii) companies sustaining much higher cash balances. The combination of (i) and (ii) implies lower near term refinancing requirement for existing debt; hence most bond issuance has be used for the only other purpose -- takeovers.

    Readers deserve better quality journalism than this, which reads as though tapped out on a blackberry in a cafe.

    I'm happy to help write some Peston's Picks if you'll give me a job.



  • Comment number 13.

    "King and Bernanke rescue mega takeovers"

    The men are idiots of the first water. Yet again they show that they do not understand what their role has been and is in regulating the free market economies. What we need to do is bury both of them before we can start to hope for a real recovery - which cannot come through mega mergers fuelled by ever more debt. This debt should be financing new business not failing ones. We have not hope so long as these economically evil Harvard twins remain in post.

  • Comment number 14.

    It's like the old conglomerates episode. So a dying bubble looks to escape as a bubble in equities, where stock increases in value through acquisitions. It will end the same way.

  • Comment number 15.

    Just what we need at the moment: more debt!

    So we go back to the bad old days because the governments of the world were too weak to reform the financial markets.

    This is the price of bailing out the banks: nobody has learned a thing.

    Those who refuse to learn the lesson of history are doomed to relive it.

  • Comment number 16.

    Debt-financed M & A (and lets face it, it almost always is) very rarely produces anything of value, other than inflation. CEO's talk about synergies between businesses, but they are rarely realised. Most takeovers are to remove a competitor, buy market share and so forth, and to edge the company toward being a monopoly, while hopefully not falling foul of anti-monopoly laws from the companies view, yet there are still likely to be large pockets of customers being edged toward having a single vendor to buy from. Innovation ceases, and margins go up to pay back the debt (just ask Manchester United supporters.) The figures begin to look good, mostly driven by the elimination of competition, but this most capitalist of actions almost always results in a stagnation more reminiscent of Soviet planned economies. What is needed is a big brake on the credit that is needed to fuel mega deals.

  • Comment number 17.

    > But although poor Guy Hands of Terra Firma may be floundering
    > around in EMI's $5bn of debt, things are looking up for private equity
    > in general.

    Poor old Guy, eh? He's in exile in Guernsey, hiding from the tax man (and his creditors?) Would it be legal to maroon all the private equity brigade over there; permanently?

  • Comment number 18.

    Robert wrote -"the Fed and the Bank of England may have fueled a return to boom boom in takeovers"

    Do we really want to return to that Basil Brush scenario again? Guy Hands is showing he wasn't a handy guy, the Glazers have glazed Man U with a covering of debt and Iceland have managed to melt their economy. Only those oft despised bankers will be rubbing their hands with glee at the mouth watering, or should it be eye watering, commissions.

  • Comment number 19.

    # 15. At 1:50pm on 05 Feb 2010, stanilic wrote:

    > Just what we need at the moment: more debt!

    To be fair, one man's debt is another man's fortune. I quite like people to be rather indebted to me, as long as I can trust them (or force them) to pay me back.

    The trouble with the credit crunch was that "you can't get blood out of a stone". When there is small prospect of getting back the dough you've laid out, and people get to hear about it, then your credit dries up. You go broke, the prospects drop through the floor, and nobody lends to anybody – you end up like Guy. The answer is (A) to require good collateral, not silly collateral based on noddy models written by callow youths in the the phd brigade, (B) have a large buffer of money, in case things go pear shaped, (C) be so small that nobody gives a hoot if you go down and (D) tie compensation to very long term performance.

    We have to force those attibutes on organizations - thet won't take them on voluntarily.

  • Comment number 20.

    Robert Preston wrote:
    Where the US leads, the UK usually follows.

    And that's the problem!

  • Comment number 21.

    Which means that so long as global markets don't seriously crack as the result of growing concerns about heavily indebted countries' ability to pay their way - and that is a big if - then the Fed and the Bank of England may have fuelled a return to boom boom in takeovers.


    But the rest of the world - the vast majority of the world's population stays in 'global recession' - the power and money concentrated in the hands of the financial priests, bank driven with 'capital' - much of this 'capital' rightly the collective property of depositors, shareholders and investors.

    148. At 12:58pm on 05 Feb 2010, Barry wrote:

    33, WolfiePeters:

    I work in mergers and acquisitions. The average senior person (not me, unfortunately) probably generates US$5-10 million and gets paid US$2 million. Now if the bank cuts his/her pay to US$500,000 for a year or so it isn't that easy to just leave, find employment elsewhere and keep the same client base and revenue generation capacity; so he/she would probably stay. However, if it's a permanent pay cut, then that person would certainly leave and take their revenue generation with them.

    Whilst there are synergies and advantages of working at a large, international bank, mid sized advisory and other boutiques are expanding and private equity firms are beefing up their own advisory departments. Many bankers are looking to move to such firms, since why would one want to stay with pay constraints and being blamed for a financial crisis we had no part in?

    A lot of arguments about how we don't deserve our high pay. That is true. But it is also true for many private sector jobs. Clients pay us a lot because they appear to feel what we do is useful.



    'Clients pay us a lot because they appear to feel what we do is useful.'

    Clients pay a lot because they expect a lot - and generally easy to make a lot with the banks playing with our money.

    Who is the Client? The Client is, I think, the 'collective' and not just the 'individual client' and so it is immoral and disproportionate for a single client and single bank employee to make these vast sums of money by leveraging the capital, rights and privileges of all and sundry but mainly the 'collective' (public interest?).

    Where are the rights and privileges of the 'collective' in all of this?

    The 'collective' does, I think, include the general public who create and support a stable economy to allow the banks to operate and who ultimately under-pin their privilege of a 'banking licence'. The client also includes those holding pensions from companies who again buy shares and other investments for the banks to leverage.

    There's a lot going wrong here and its the collective that is missing out big time - the bank profits need sharing out in priority of 'collective responsibility' - and then if there is any left individual abank employees can a get a bonus if there is anything left (i.e. in addition to their salary).

    The 'collective' is getting robbed here - every second - millions and millions of pounds - this robbed money needs to put back into the 'collective'.

  • Comment number 22.

    The current financial crisis has cut the value of some large businesses and the sharks always smell the bood. The governments, with shown incompetence and/or corruption facilitate these processes through political and legislative neglect. As theives would cross borders in the past they now just hold up in large office towers. If the investments are with their money, they take the risk but as we have become aware many institutions take your money and use that for risky investments as they can make large amounts of money just doing the deal and if the company fails they have already made their profit. And if it all falls apart the taxpayers can pick up the costs.

  • Comment number 23.

    so biodiversity and the preservation of species is good but business diversity is bad then.. It has always puzzled me how this kind of market practices benefit the consumer. Lower prices maybe, but definitely less choice. Less choice for less money. It may make sense in businesses where the investment requirements are high such as pharmacuticals perhaps, but chocolate, an already low priced commodity product, for instance? Please explain Robert...

  • Comment number 24.

    This of course is an unintended consequence of loose monetary policy and serves to show up the total inadequacy of this, as a "one-trick" instrument, in controlling an economy.

    But you can hardly blame King and Bernanke.... they are simply using the only tools at their disposal.

    You can blame, however, Gordon Brown and his government, who should be taking an overall view of things, whose industrial policy might best be described as "dunno"..... or perhaps "financial services is what this country is jolly good at, so let's not do anything that will make it more difficult for people to make money out of money".

    Our government SHOULD, as well as explicitly looking to reduce the size of the ridiculous financial services bubble in the City of London, be fundamentally reviewing the terms of reference of the OFT - and in particular the standard criteria by which, in any market at all, so-called "dominant" or "monopolistic" positions are assessed. If the market-share hurdle level deemed to be anti-competitive were reduced significantly, I'd argue that a huge number of take-overs that are downright stupid and will end up destroying shareholder value anyway, would never be allowed to happen, and the ordinary person/customer would benefit hugely (.... at the expense of the "financial engineers"... the investment banks etc etc).

    (How many people have had the experience of working for - or being supplied by - a company that is doing very well which is then taken over and completely falls apart?)

    We need a new industrial policy in the UK which emphasises the long term interests of customers and employees, and long term shareholders, rather than the short term interests of speculators, temporary shareholders and financial agents.

  • Comment number 25.

    Mr Peston, so when do takeovers become bad for the economy? Having competition is surely what keeps companies on their toes. Yet, in the last 20 years we have just ended up with larger and larger conglomerates with less competition in the market place. In my view, governments are a useless waste of space when it comes to controlling large companies ability to merge or be taken over. Governments don't govern they just let large companies do what they like and if a thousand people lose their jobs because then the government says ah well that's just laissez-faire free capitalist economics. How do we create competition rather than letting massive companies like Kraft destroy it through debt financing?

  • Comment number 26.

    Mr Peston you wrote this morning :

    'But although poor Guy Hands of Terra Firma may be FLOUNDERING AROUND in EMI's $5bn of debt'

    EMI (et al): Sounds like a ship filling with water and about to sink...judging from your own blog on the matter.

    So would FOUNDERING be a better way of expressing matters ? I flounder in an overdraft of five hundred founder in debts of 5bn.

    PS Having spent time in Germany recently I can report back that you have a select and loyal following there. To my amazement some of your blogs came up in German, with the 'posts' in German too. Do the BBC use translators for this...or just some excellent computer program ?

  • Comment number 27.

    Surely, takeovers at Debt Inflated prices are a bad idea ?

    An Economy built only on Debt is built on shaky foundations.

    But what do I know ? Hedgefunds like music are a closed book to me!
    I would no more try to run a hedge Fund than would I try to play an instrument of any sort.

    Its just more gambling with other peoples money.

    What is needed are some real products for people to produce to sell abroad or exchange and trade controls, to enable reductions in imports of goods that could be home produced.

    With the loss of Cadbury's another British trading company has gone, and the British based production will probably wither away.

  • Comment number 28.

    Spot on supercalmdown.

    Also Justin150 is correct Germany and France would not allow these takeovers and the inevitable exporting of production and jobs whether it be private equity companies or not. The Germans have very effective union laws on such matters and the French would just blockade the roads and ports.

    It's probably because these private equity and large corporations know that the British are too thick to protect themselves and will put up with any asset stripper doing whatever he wants.

  • Comment number 29.

    Who exactly is buying the company bonds and why are the doing so?

    If the companies are getting cheap money, then the purchasers are getting a poor deal. The price of bonds has been artificially inflated by the activities of the central banks and as this support is withdrawn prices will fall, and the purchasers will have lost out, especially if they bought long or medium term bonds. So why are they doing it?

    One explanation is that after the trauma of the credit crunch investors are giving more priority to security over profit, giving the bond market more natural buoyancy. Clearly, the MPC believes that this is the case and that they can now remove their QE support without seriously endangering the recovery. This view is consistent with shortage of credit for small companies that is still being reported.

    The improved buoyancy of the bond market relative to historical standards, is good news for those worried about the large government deficit. It may be surprisingly easy to fund this and it may well not be necessary to allow interest rates to rise even to the pre-crunch levels.

  • Comment number 30.

    Thank you shireblogger #4 to your reference to my post. The real credit goes to the article I saw on notayesmanseconomics blog. Indeed I see other questions on here that he has answered. It is strange that so few others spotted the Chancellors letter...

  • Comment number 31.

    21. nautonier:

    Clients are typically large listed and private companies. There's no conspiracy here. Clients can and do sometimes choose not to hire us. There are many cheaper options available, including not using investment bankers. It is not an oligopoly, in the commonly understood meaning of the term.

    Mr. Peston appears to feel differently. He should kindly produce a bit more thought and detail, a bit less opinion, and help educate us less informed readers. I suspect levels of competition are highly heterogeneous across different parts of banking. But I am left confused and ill-informed, since these "Picks" serve only to stoke spicy stories and opinion. That is why whilst I would certainly concede that we bankers are indeed overpaid, there are at least good reasons why we are paid more than journalists.

  • Comment number 32.

    31. At 10:05am on 07 Feb 2010, Barry wrote:

    21. nautonier:

    Clients are typically large listed and private companies. There's no conspiracy here. Clients can and do sometimes choose not to hire us. There are many cheaper options available, including not using investment bankers. It is not an oligopoly, in the commonly understood meaning of the term.


    There are many scenarios here regarding clients etc - most of us know that - the fact is that in a world of modern communication and more open information and analysis - the operations of many financial institutions are properly being questioned after crisis and massive taxpayer financial support. If those who receive the bonuses are so clever in banking terms to justify in their opinion their receipt of these excessive payments - Why were the same people not wise enough to see the banking crisis looming and prevent it from occurring? They obviously are not up the to the job.

    The inescapable conclusion to many is that much of the profiteering that occurs in these financial institutions for personal gain does not stand up to rigorous or even reasonable scrutiny as to how various tranches of deposits and monies are leveraged by a few in the banks to make money for individuals and groups of the privileged i.e. 'bank' employees and 'clients' who make money on the leverage provided on the banks on money owned in many cases neither by themselves or the 'banks' as it is collective capital and collateral belonging to 'us'.

    This is repeatedly borrowing of the 'golden ladder' - without asking, and without any payment for the implement that enables the money-lenders to reach up and get to the 'fruit' on the proverbial 'tree of profits'.

    If bank and other financial lenders risk only their clients and their own money in speculating with whatever - then that is a different matter - but I suspect that this is generally not the case and that is why the banking crisis occurred as we all got sucked into the mess because it is big and involves everyone who does business with the 'banks'.

    I'm sorry but the banking industry does not stand up to scrutiny and transparency and has been caught well and truly with their trousers down and it is not a pretty sight!

    Are you telling me that those bankers making these huge bonuses should be paid millions of pounds more than:

    E.g. brain and heart surgeons or indeed most GP's
    E.g. dentists
    E.g. soldiers on the front line in Brown's wars
    E.g. nurses in hospitals and old people’s homes
    E.g. fire service personnel
    E.g. front line aid workers
    E.g. barristers in court
    I'm sure I've left some people out.

    But we can leave the moralising aside - much of the bonus culture is simply antiquated process/sophisticated theft and misappropriation and distribution of monies generated and in economic terms it is also inefficient and waste as those in society who can and should be paid more for what they do (including the 'collective') - are not receiving anything near what is due.

    'Banking' is now political - and is not an 'old school money pie' anymore for the privileged few and I am certainly not a 'leftie'.

  • Comment number 33.


    Why is it that your paragraphs contain only 1 sentence?

    And sometimes only half a sentence?

    9/10 for content; 4/10 for style.


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