Friday, November 17, 2006

M&A party is rocking, for now

On today's Business Week Online "Deal Flow" blog:

Researcher Dealogic reported today--and I know, this is a shock--that global M&A volume has hit an all time record....

Before too long, we're likely to see another record broken, as investment bankers share the largest bonus pool in history.

I know, everyone hates a buzz kill. But I won't be surprised a few years from now if the M&A party is followed by a huge hangover, as more and more of the principal on the junk bonds used to finance these deals has to be paid back. It's a borrowers market. Lenders are competing to win deals. I hear a number of them have been offering easy terms, in which a few years of interest-only payments are allowed. But if financial sponsors can't make an exit, they will be stuck with huge bills when the payments on principal kick in three, four, five or more years down the road. Weaker acquisitions are going to be under extreme pressure at that point, as limited cash flow is stretched to pay back expensive junk debt. It's like the corporate version of an exotic mortgage.

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