Buyouts in the tens of billions of dollars were all the rage on Wall Street just weeks ago, but market observers say an abrupt credit crunch has spoiled the dealmaking party.
The days of cheap credit, which fueled a buyout boom, appear to have evaporated as major banks have revealed vast losses tied to risky mortgage-backed securities.
MELTDOWN
Fearing a worsening meltdown in the distressed US housing market, the banks are seeking to preserve cash and curtailing their lending to private equity firms who stoked a buyout frenzy this year.
"I think it's unlikely the next six months will be nearly as active as the last six months," said Michael Weisbach, who holds the Golder chair in corporate finance at the University of Illinois.
Weisbach, who has just co-authored a study on the financing behind 153 large buyouts, said deals will still occur, but they will likely carry lower price tags.
Just a month ago, private equity giant Blackstone launched a US$26 billion takeover of the Hilton Hotels Corp after toasting a partial stock market listing which raked in over US$4 billion.
Such deals propelled the Dow Jones Industrial Average stock barometer to a record high of just over 14,000 points in the middle of last month, partly as investors bid up stock prices on the back of big buyout deals.
Other private equity firms, including Kohlberg Kravis Roberts and the Carlyle Group, also participated in the buyout binge.
Joel Naroff, the chief economist of Naroff Economic Advisors, who is a consultant to Commerce Bank and advises companies on economic risks, agrees the buyout spree will moderate.
"I expect the buyout process will slow quite a bit and probably stay that way the rest of this year and possibly the first half of next year," he said.
Wall Street shares have fallen hard and fast in recent weeks, the Dow is hovering around 13,000 points, as homes sales continue plummeting amid a surge in foreclosures.
Several big banks including Goldman Sachs and Bear Stearns have revealed trading losses or had to inject hundreds of millions of dollars into troubled investment funds.
CAUTION
The stock market slump has made banks more cautious about extending credit which is the lifeblood of private equity firms. Such firms take on debt to buy out companies, hoping they will be able to re-structure them and sell them for a tidy profit within several years.
The financial turbulence, which has made lenders more risk averse, was apparent in a deal mounted by three private equity firms to buy out Home Depot's wholesale supply division.
Home Depot, the US' biggest home-improvement retailer, had planned to sell its supply unit for US$10.3 billion.
But it announced on Tuesday that the deal's price tag had sunk 17 percent to US$8.5 billion following intense negotiations.
The three private equity firms behind the buyout, Bain Capital Partners, the Carlyle Group and Clayton, Dubilier & Rice, said in a joint statement that they were pleased to have pulled off the deal "in the face of challenging conditions."
Such conditions did not exist before this month when private equity firms were falling over themselves to buy out companies and banks were willing courtiers.
Weisbach said the ongoing fallout will likely affect "the valuations and profitability of some of the deals done in the last couple of years."
The credit squeeze is not just affecting private equity firms and their wealthy owners, as millions of Americans are going to face tougher scrutiny applying for home and car loans.
"The pain isn't over because the process hasn't run itself through. It's a new environment for a lot of people," Naroff said.
MORE VISITORS: The Tourism Administration said that it is seeing positive prospects in its efforts to expand the tourism market in North America and Europe Taiwan has been ranked as the cheapest place in the world to travel to this year, based on a list recommended by NerdWallet. The San Francisco-based personal finance company said that Taiwan topped the list of 16 nations it chose for budget travelers because US tourists do not need visas and travelers can easily have a good meal for less than US$10. A bus ride in Taipei costs just under US$0.50, while subway rides start at US$0.60, the firm said, adding that public transportation in Taiwan is easy to navigate. The firm also called Taiwan a “food lover’s paradise,” citing inexpensive breakfast stalls
TRADE: A mandatory declaration of origin for manufactured goods bound for the US is to take effect on May 7 to block China from exploiting Taiwan’s trade channels All products manufactured in Taiwan and exported to the US must include a signed declaration of origin starting on May 7, the Bureau of Foreign Trade announced yesterday. US President Donald Trump on April 2 imposed a 32 percent tariff on imports from Taiwan, but one week later announced a 90-day pause on its implementation. However, a universal 10 percent tariff was immediately applied to most imports from around the world. On April 12, the Trump administration further exempted computers, smartphones and semiconductors from the new tariffs. In response, President William Lai’s (賴清德) administration has introduced a series of countermeasures to support affected
CROSS-STRAIT: The vast majority of Taiwanese support maintaining the ‘status quo,’ while concern is rising about Beijing’s influence operations More than eight out of 10 Taiwanese reject Beijing’s “one country, two systems” framework for cross-strait relations, according to a survey released by the Mainland Affairs Council (MAC) on Thursday. The MAC’s latest quarterly survey found that 84.4 percent of respondents opposed Beijing’s “one country, two systems” formula for handling cross-strait relations — a figure consistent with past polling. Over the past three years, opposition to the framework has remained high, ranging from a low of 83.6 percent in April 2023 to a peak of 89.6 percent in April last year. In the most recent poll, 82.5 percent also rejected China’s
PLUGGING HOLES: The amendments would bring the legislation in line with systems found in other countries such as Japan and the US, Legislator Chen Kuan-ting said Democratic Progressive Party (DPP) Legislator Chen Kuan-ting (陳冠廷) has proposed amending national security legislation amid a spate of espionage cases. Potential gaps in security vetting procedures for personnel with access to sensitive information prompted him to propose the amendments, which would introduce changes to Article 14 of the Classified National Security Information Protection Act (國家機密保護法), Chen said yesterday. The proposal, which aims to enhance interagency vetting procedures and reduce the risk of classified information leaks, would establish a comprehensive security clearance system in Taiwan, he said. The amendment would require character and loyalty checks for civil servants and intelligence personnel prior to
RSS