“Merger Monday” was an exciting weekly feature of life during the 2007 bubble. It was the day when mega deals were announced, when all the craziness of leveraged buyouts invaded CNBC’s morning shows with great hoopla, and stocks would surge, and surging stocks would beget more buyouts and more hoopla, and fees and profits were extracted out of thin air, and everyone was in heaven.
After it all collapsed, I thought we’d never see “Merger Monday” again, the phrase, the concept. But now, the unthinkable happened, the impossible, the zombie phrase has walked back into the scene, when it reappeared on the front page of MarketWatch. It was like in the olden days of 2007: the big numbers were there, the exuberance was there, the craziness, the media hoopla, the head-shaking.
There was the acquisition by Japan’s booze conglomerate Suntory of US booze conglomerate Beam for $83.50 per share, a 25% premium from Friday’s closing price. Their combined booze sales would amount to $4.3 billion. The $16 billion deal, including debt, would be funded mostly with debt.
Among the brands Suntory will pick up is Maker’s Mark, which got into a huge tussle a year ago when it told its customers that it would water down its bourbon. “Fact is, demand for our bourbon is exceeding our ability to make it, which means we’re running very low on supply,” explained COO Rob Samuels at the time. They’d add water to the remaining batch, and lower alcohol content from 45% to 42%, so that there’d be enough for everybody. The uproar was immediate, including right here by yours truly…. Self-Medicating With Watered-Down Bourbon: An Insidious Inflation
Next was Charter Communications, backed by media mogul John Malone. It offered to buy Time Warner Cable, the second-largest cable company behind Comcast, for $132.50 per share, $83 in cash and $49.50 in Charter stock. Rumors had been flying for months. It’s tough out there for cable companies. TWC lost 825,000 cable TV subscribers in 2013, after having already lost 530,000 in 2012. And 2014 doesn’t look exactly bright. So banding together might help, the theory goes. The $61 billion deal would have been the largest unsolicited takeover since the final days of the bubble in 2008. But it was just a “low-ball offer,” as TWC CEO Rob Marcus called it. An even bigger deal may now be in the cards.
And Google announced that it would acquire thermostat and smoke-alarm maker Nest for $3.2 billion, a routine amount these days for a startup that was founded a couple of years ago, has about 300 employees, and is not even making a dent in an industry dominated by giants Honeywell and Johnson Controls.
But Google would get a foothold in the latest hot thing, connected devices, the “Internet of things.” It already knows everything you do on line and stores that information forever. It knows everything you do in your various Google accounts. It reads your emails, data mines them, and stores the results for later use. It knows where you’re going if you use an Android device, and it knows where you’re thinking of going if you use Google maps. Soon it will drive you there in a self-driving vehicle of your choice (or drive you to an advertiser’s store instead).
It knows what the outside of your place looks like, but the one thing it hasn’t seen yet is the inside of your place. Hence Nest. Google is entering your home with a sensor system that will soon be a lot more than just a thermostat – why not motion detectors, cameras, microphones, and the like – to perfect the efficiency and security of your home. Any data the system picks up will be forwarded to, or pilfered by, the NSA and others, and will be used by advertisers who want to get to know you better, because serving ads is what Google is all about.
But Monday didn’t end on this uplifting note. There was more excitement fermenting beneath the surface. It was all about “leveraged loans.” They’d hit an all-time high in 2013 of $1.14 trillion, and market participants are exuberant about 2014, according to Thomson Reuters’s Quarterly Lender Survey. Alas, in its minutes of the December meeting, the Fed had named leveraged loans and their deteriorating underwriting standards as one of the four threats to “financial stability.” They’re issued to highly leveraged companies with dubious prospects and junk credit ratings. And many of them are going to blow up once the mania fizzles out.
But not yet. Everyone is counting on rock-bottom interest rates to persist, and on desperate investors who’re chasing yield when there is none in reasonable places, and so they take on risks, any risks, and they hold their noses and swallow covenant-lite junk debt that gives them few rights once there is a problem. In 2013, $311 billion in covenant-lite loans were issued, more than triple the prior all-time high. And everyone is hoping that this year will set another record. After us the deluge.
Did a company have problems servicing its debt or did it threaten to default? A replacement leveraged loan would be offered with better terms. Extend and pretend…. Last year, about 70% of the leveraged loans were issued to reprice and refinance existing debt.
But for 2014, that may be hard to beat. So enthusiasm is building in another direction: mergers and acquisitions. “It’s nice to see that M&A is starting to pick up, and that should provide a new source of fresh capital needs from borrowers,” said Leland Hart, a Managing Director at BlackRock. And everyone is already dreaming of a series of glorious Merger Mondays.
So the mini-downdraft in the stock market so far this year, including Monday’s selloff, hasn’t dampened anyone’s enthusiasm. The Fed seems ready to taper QE out of existence and is sprinkling the market with verbiage to that effect, and eventually this will have an impact, but at this point, it is still just talk, and everyone is hoping that this bubble can be maintained for a while longer.