Managing Expectations and Leveraged Buyouts

Managing Expectations of Stock Market investments over the next 6 months, and being careful, as an investor, to understanding the potential economic downfalls resulting from Equity Leveraged Buyouts will be a major challenge this year. I have selected two articles from the CFO Magazine to help aquaint investors with some of the dynamics taking place in this paradigm shift in the U.S. economy.

Managing Expectations
The Aging Bull
As of last October, the U.S. economy had entered the third year of another bull market, the fourth in 20 years. Typically, say economists, up cycles last only 4.5 years. Research by Standard & Poor's has found that most turn flat or lower by the 36-month mark. (Except, of course, in the 1990s, when the economy grew almost continuously for 10 years. Most analysts and economists view that as a once-in-a-lifetime occurrence.)

The problem for companies: keeping expectations in line. After all, many analysts and shareholders have witnessed only one down cycle — the collapse of the Internet bubble. The challenge is to convince them that the bubble wasn't an aberration. Already indicators are suggesting a slowdown — the S&P 500 index, for example, posted a gain of only 9 percent last year, compared with 26 percent in 2003. With issues like a budget deficit that is spiraling toward $500 billion, a widening trade gap, and the continuing war in Iraq, this bull is far from certain to keep charging.


Mergers and Acquisitions
Debt to Equity to Cash

It might surprise Seventh Avenue, but there are fashions in financings, too. In the 1980s, leveraged buyouts were all the rage. In 1988 alone, 388 LBOs were completed, averaging $458 million in value. The purchase of RJR Nabisco for $31.5 billion — $30 billion in the form of debt — made headlines. But soon after the deal closed, RJR almost collapsed under its own weight, and none other than Henry Kravis, the financier who engineered the deal, later admitted: "Debt is out, equity is in."

Was it ever. In the 1990s, deals in entertainment (Viacom), financial services (Citigroup), and telecommunications (Verizon) were fueled by accelerating stock prices. Some (AOL/Time Warner) destroyed value at a mind-boggling rate. Nonetheless, the average annual worth of deals announced between 1998 and 2000 reached $1.6 trillion — on paper anyhow.

When that paper collapsed, cash became king. Now, on the precipice of another deals bonanza, equity — like the mink stole — is creeping back into style. Procter & Gamble's $54 billion deal for Gillette, for example, is mostly in stock. LBOs are also back in vogue. Will we soon ask if anyone has learned from past mistakes?

Visit the CFO Magazine Web site of additional articles and information.
http://www.cfo.com/