Much of the deal activity this year has been driven by the private-equity industry. In America, $289 billion of deals have been agreed so far. In Britain, the market is still buoyant, although activity has not quite reached the dizzy heights it touched last year. In the first nine months of the year, the value of buyouts totalled £16.9 billion, compared with £24.2 billion for the whole of last year, according to the Centre for Management Buyout Research.
Industry executives and advisers see no reason why the global rush of private-equity deals should slow down. The firms have raised record funds. There is no shortage of money or confidence.
Piers de Montfort, Credit Suisse’s head of investment banking for UK and Ireland, said: “The common denominator is cheap debt — while it continues to be available we are going to see the wide variety of transactions, across sectors and geographies, we have seen in the past couple of years across Europe. This is what is driving activity in the M&A market, alongside the perennial need for public companies to deliver growth in earnings to achieve premium ratings.”
All that cheap money and confidence is leading to some big talk. Last week one private-equity chief was quietly predicting that a top 10 FTSE company could fall to venture capitalists next year.
PRIDE comes before a fall. Some outside the investment banks cannot believe Magie Noir will be on the cocktail list this time next year.
“It’s like musical chairs,” said Ken Goldstein, economist at The Conference Board, a New York research group. “Only this is a game where you don’t want to be sitting in the last chair.” Goldstein said the M&A cycle was always the same. Companies go on a buying spree and others follow suit. Confidence grows. Eventually the good buys have gone and someone ends up sitting on the dunce’s stool. When everyone notices, the cycle stops.
The danger lies in how that cycle comes to an end. In the dotcom boom prices rose too high, too fast and too soon. A lot of the promise of the telecom and dotcom boom has come to pass. But the terrorist attacks of September 11, 2001, destroyed investors’ already waning confidence and a lot of frothy deals ended up looking very bad.
This time there are new uncertainties to deal with. A forest of hedge funds has sprung up since the last stock-market boom. They operate largely in secret but control huge tranches of the stock market. Already one big fund, Amaranth, has collapsed after losing $6 billion making bad bets on natural-gas prices. This had a real impact: California’s San Diego County lost an estimated $85m from its employee pension fund. But the markets were largely unmoved.
“When I saw that Amaranth had blown up I thought ‘that’s it for the deal for a while, confidence will be blown’. But the markets talked about it but were otherwise completely unfussed. It has given us huge confidence going forward,” said one banker.
Other observers say that this is the wrong way to look at hedge-fund risk. There have been persistent rumours of more collapses to come, and a series of collapses could have a devastating effect on financial markets, said Goldstein.
Then there are the emerging-market investors. China, India and Russia lack the transparency of western economies; they are almost as opaque as hedge funds. A disaster in any of these countries could have an enormous impact on confidence.
“This time our blindspot or the great unknown is Russia and China. People say they understand it, but they don’t,” said one banker.
The party is in full swing, but the headache is coming. Right now nobody knows when or how severe it will be.
BANKS PLOT RIVAL EXCHANGE
THE stock exchanges have been among the biggest beneficiaries of the booming market, so it is hardly surprising that they have themselves been the subject of long-running global takeover battles.
Last week, the European exchanges faced a new threat when seven investment banks unveiled plans to create their own exchange. The plot, codenamed Project Turquoise, has been formed by Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS, which are responsible for 50% of volumes on the London Stock Exchange (LSE).
The banks claim the charges of all the European exchanges — in particularly the LSE — are too high and since their demands for the exchanges to lower fees have been ignored they have decided to create their own, mutually owned exchange.
The LSE’s share price plummeted nearly 10% on the news, but quickly recovered as commentators — including the LSE — dismissed Project Turquoise as an insubstantial bluff by the banks to get prices lowered. The LSE has pledged to cut costs but is hamstrung because, if it cuts costs, its share price will plummet, leaving it vulnerable to predators.
“Anyone can say they’ve set up an exchange,” said one insider. “But the reality is, it’s not the banks’ flows but their clients’, and clients want the best execution. The LSE has the best liquidity and technology around, even if it does cost more.”
There have been previous attempts to set up new exchanges. During the 1990s new electronic trading platforms and websites were springing up constantly.
But the banks insist that this time it is different because new regu- lations will make it possible. Next year, the European Commission is issuing its markets in financial instruments directive, or Mifid, which is the culmination of its efforts to open up competition in exchanges.
Last January, 10 investment banks started work on Project Boat, which aimed to cut the costs of share reporting. Under Mifid, traders will be free to register shares anywhere.
Members of Turquoise are now trying to establish a management team. But their biggest challenge is to find a platform provider with technology and services that can compare with those of the LSE.
