Credit crisis is throwing cold water on merger deals

The Baltimore Sun

NEW YORK -- Like airplanes backed up on a runway, dozens of pending multibillion-dollar corporate buyout deals involving such familiar names as Hilton Hotels and Clear Channel Communications are waiting to take off.

But if Wall Street's instincts are correct, the global credit crunch might ground some of them. Plunging stock prices of companies that already have agreed to be bought at higher values suggest that investors believe some deals could be shaky.

There's more at stake than big year-end bonuses on Wall Street. Any fallout from a string of busted buyouts could ripple through to hit many ordinary people, experts say.

That's because a slowdown in merger activity and the scrapping of existing deals could hurt the overall stock market, which rode the frenzy of buyouts the past few years led by investment banks and huge private equity funds.

Declining stock values could sap consumer confidence and consumer spending, which in turn hurts the economy and ultimately puts people out of work.

What's more, so many Americans are invested in the stock market through their IRA and 401(k) accounts that, even if their jobs are safe, their retirement savings could suffer.

"This is a classic crisis of confidence, not a problem with economic fundamentals," said James A. Bianco, a bond analyst and investor in Chicago. "But that doesn't mean it couldn't cause harm."

Market pessimists say there is more pain to come as banks and investors cope with the hangover from years of easy credit and a blase attitude toward risk.

Future deals, when they come, will be done at lower prices, at higher interest rates and with more realistic - that is, harsher - terms for borrowers.

More optimistic analysts say that, while home sales and prices are falling from record highs, rising mortgage defaults - the root cause of credit concerns - aren't as pervasive as the investor reaction would suggest.

It's also hard to gauge the severity of financial markets' problems because August is the slowest month on Wall Street, and things could change after Labor Day.

In the meantime, scores of buyout deals are waiting to close.

Two of the higher profile ones include radio giant Clear Channel Communications Inc., which agreed to be sold for $19.5 billion to investors Thomas H. Lee Partners and Bain Capital, and hotel chain Hilton, which plans a sale to Blackstone Group for $26 billion.

Clear Channel shares closed yesterday at $35.77 with Hilton's ending up at $45.20, reflecting discounts of 9 percent and 5 percent, respectively, from their buyout prices. Both stocks have bobbed around in recent days.

More mega-deals are awaiting completion today than at any other time, thanks to the frenzied competition earlier this year to take companies private in leveraged buyouts.

Citigroup analyst Prashant A. Bhatia has counted 47 pending transactions valued at $1 billion or more, led by private equity company Kohlberg Kravis Roberts' record $37 billion agreement to buy the Texas-based utility TXU Corp.

"The backlog will take several months to clear," Bhatia said. "The volume of deals will slow down, and very big deals won't happen at all."

The spreading turmoil shows how interconnected the global financial markets have become, with the increasing convergence of laws, currencies and Internet communications.

Ripples from the crisis in the riskiest part of the U.S. mortgage market, involving so-called subprime home loans, splashed across borders to Asia and Europe and across investment sectors to the seemingly unrelated market for corporate bonds.

What's happening with mortgages affects corporate bonds because, in many cases, the investors are the same people.

A hedge fund that borrowed money to invest in mortgage-backed securities and is now facing repayment demands from its lenders might be forced to sell its corporate bonds to raise cash.

That pushes down bond prices, even if the corporations issuing the bonds are doing good business and have no trouble making payments.

Bond investors have become far more skittish, which is a big problem for the investment banks involved in the mega-deals.

The banks agreed to finance the deals with the intention of selling loans or bonds to outside investors. But now, with bond investors balking, the banks may be forced to keep much of the debt on their own books. That means they will have less money available to lend until bond buyers come back to the market.

Shares of potential targets such as Macy's Inc. and RadioShack Corp. have plunged by as much as a third from month-ago levels as deal rumors have died down.

As for the buyouts that are pending, experts say that most of them ultimately will close because the banks' financing commitments legally compel them to follow through unless there is a fundamental business change in the companies involved.

Thomas S. Mulligan writes for the Los Angeles Times.

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