Takeover Tuesday

‘Takeover Tuesday’ was a phrase I came across describing several M&A deals announced earlier this week (Thomson & Reuters, Heidelberg & Hanson etc) and no doubt many more will follow in the coming weeks and months. I and other members of the team have written at length about this releveraging of corporate balance sheets, its implications for the corporate bond market and the implications for our funds (see links at bottom of this article).

As a brief reminder, the reasons for this releveraging are relatively low global interest rates, low market volatility, high risk appetite, ever more aggressive and cash heavy private equity funds. Looking forward, healthy corporate balance sheets and equity earnings yields above the real cost of corporate debt all support the continuation of this theme.

In fact a recent research piece by UBS suggests that we are merely mid cycle with a worldwide capacity for over $2 trillion in buyouts during 2007, and interestingly, what was once largely a US phenomenon is now far more balanced globally. But what if, as the data seems to suggest, much if not all of the low hanging fruit has now been picked?

The result is that we are likely to see ever more aggressive leveraged buyouts. Companies that no longer demonstrate many of the characteristics that have historically been considered a prerequisite of an LBO (be those size, positive cash generation, low leverage, defensive margin profiles to name a few) are now very much on the radar for private equity. In a corporate bond market priced to perfection this concerns me and accordingly I remain cautiously invested.

Other stories of interest:
– 26/04/07: Default rate is the lowest in 10 years, but the only way is up
– 30/03/07: Record global M&A activity in Q1
– 28/02/07: The long term effects of PE
– 11/12/06: Letter from New York Part II
– 16/11/06: Private equity continues to dominate the investment headlines

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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