Qantas (ASX: QAN), after playing coy with Macquarie Bank (ASX: MBL) all day yesterday, finally relented to the advances of Australia’s most charming and cashed up bank, along with its retinue of private equity courtesans. The deal was consummated when the private equity entourage upped its offer by a mere ten cents per share, which amounted to a deal worth about $11 billion. With enough borrowed money, everything in this world appears to have its price (at least if it’s a publicly listed stock.)
And in one of those ironies that markets unintentionally serve up, we also read that New Zealand’s Independent Liquor was snapped up by another pirate equity partnership from Pacific Equity Partners and CCMP. The whole of Australia, it seems, is getting drunk on cheap money and expensive booze.
Only sober people can manage to be gloomy in this kind of market. And there are still a few sober people left. “Private equity firms, with the gearing they bring to the market, are causing a lot of concern about what the after-affects might be,” says Matt Drennan of Zurich Australia. After what?
“There’s a spending binge under way, when markets are already at high valuation on the top of an investment cycle…when the unwinding comes, you will see a general depression of stock values and views about equities as investment vehicles for the average punter and professional investors alike…and that may well occur in the next twelve months or so.”
It may. In fact, we know for certain that when it’s all over it will certainly result in investors hating stocks, shunning debt, and making the pirate equity captains of industry walk the plank. There will be show trials. And like Jeffrey Skilling serving 24 years in a Federal prison, we’d put even money on someone going to the brig to satisfy a bitter and poorer public. But we wouldn’t count on the whole thing happening in the next twelve months.
One thing debt has proven to us in the last ten years is that it has great staying power, especially for something that comes from nothing. Unreal money can lead to real misallocations of capital, as well as misallocations of investor time and attention. And we suspect 2007 will be remembered as an epic year for merger and acquisition activity…when banks and private firms spent borrowed billions in a frantic contest for ownership of publicly listed companies and their future cash streams.