Monday, May 21, 2007

When Will the Buy-Out Splurge End?

There was an article in the print version of Barron's this week. I can't find it online, but wanted to give credit where it is due. The author was discussing when the buy-out mania currently gripping the markets would end. He made the following points.

1.) When the sheer size of the deals becomes astronomical. So far the size of the deals has been pretty contained, especially considering the strength of corporate balance sheets. There are two recent deals that do raise flags. The first was Newscorp's bid for Dow Jones. The thinking here is Newscorp was making a bid so large it would fend off all possible competition. However, the bid was way over the asking price as expressed by the share price of Dow Jones. The second was the recent Microsoft deal when they bid an 80%+ premium for an online ad company. Microsoft is a cash rich company, so they have the money to throw around. But, they could have bid a 50% premium at most and probably gotten the deal. My guess is they were using the same logic as New Corp was in the Dow Jones deal -- putting a bid in play that was so large it would fend of rivals. In addition, several competitors successfully purchased other online ad companies, so Microsoft may have simply wanted to get in while the getting was good. However, the premium does raise a bit of a flag.

2.) When diversification starts to really stretch the imagination. So far the announced deals pretty much make sense. For example, the web companies are clearly moving into the ad area, aluminum companies are buying other aluminum companies etc... When we start to see mergers that strain business sense -- an aluminum company with a newspaper -- then we'll start to think the merger boom has gone too far.