The Ultimate Smart Money Sits On A Near-Record Pile Of Cash, Sells Holdings Instead Of Buying, And Waits For Market Swoon.

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

Mergers and Acquisitions activity in the US jumped 60% this year over the same period last year, according to a Goldman Sachs report. But LBOs?

After years of a relentless run-up in stock prices, corporations are busy gobbling up overvalued companies with their own overvalued shares of which they can print an unlimited amount, and they’re raising debt that is nearly free after inflation, and/or they’re using the cash on their balance sheets rather than investing it in plant, equipment, and personnel.

The higher the price, the better. Bidding up each other’s stocks collectively has been one of the powerful drivers behind the soaring stock market, which has encouraged even more acquisitions, and everyone on Wall Street knows this, so they push M&A activity relentlessly. And then there are the big fat fees extracted from every deal.

Companies have other reasons. Acquisitions add to their revenues when organic revenue growth has stalled or turned negative. They’re a way of getting rid of a pesky competitor and clear the way for an oligopoly that has more pricing and lobbying power. And best of all, acquisition accounting allows acquirers to lump all sorts of expenses paid for with real dollars and real shares, both of which come out of the stockholders’ pocket, into a “non-cash” acquisition-related charge that analysts and investors have been well-trained over the years to ignore. Expense problem solved.

And so corporate M&A activity has soared this year. But according to a Goldman Sachs report cited by the Wall Street Journal, the number of LBOs year has collapsed.

A typical LBO involves one or more private equity firms, in association perhaps with some lenders, who take a publically traded company private. In the process, they leverage up the acquired company with a mountain of debt. For instant gratification, PE firms then often draw cash out of the acquired company via a special dividend.

But not this year.

PE firms are awash in cash: $465 billion “recently,” up nearly 20% from the same period last year, according to the report. PE firms are the ultimate smart money; instead of buying companies and doing new LBOs, they’ve been dumping their prior LBOs, either by selling them to the public as IPOs or by selling them to large corporations that can print an unlimited amount of their overvalued shares to buy an overvalued company from a smart PE firm…. You get the idea who is going to pay for this.

This year, public-to-private LBO volume plunged to $3 billion, the lowest level since crisis year 2009, when deal volume dropped to zero.

Last year, there were still $80 billion in public-to-private LBOs, including four deals of over $5 billion each:  H.J. Heinz, Dell, BMC Software, and Neiman Marcus. Between 2004 and 2013, the average was $75 billion in these deals per year. The record? LBO bubble year 2007, just before the house of cards came crashing down: $275 billion in deals.

This included the most gigantic LBO of them all, the buyout of TXU, the largest electric utility in Texas, which was acquired in a $47 billion masterpiece of Wall-Street engineering by KKR, TPG Capital, and Goldman Sachs. The smart money piled $40 billion in debt on the utility. Now, Energy Future Holdings, as it has been renamed, is trying to sort out its future in bankruptcy.

While PE firms are ferretting out opportunities overseas, there’s no appetite for public-to-private LBOs in the US this year – despite the near record piles of cash PE firms are wallowing in. But there’s a reason.

Unlike corporations that can just print more of their overvalued shares to buy already overvalued companies at a big premium, PE firms are turned off by the current valuations. Their business model gets very tough if they overpay by ridiculous proportions for their acquisitions. And so the smart money is more interested in selling its current holdings into this wondrous stock market, rather than buying at these levels.

And when will PE firms, the ultimate smart money, become buyers again? Goldman gives it a good guess: they will likely wait until after the stock market has come down from its lofty heights. And this could be by a lot, because that’s what it would take to make the equation work. Until then, the ultimate smart money will just keep its powder dry.

Markets are ebullient and in no mood to listen to the Fed’s rate-hike cacophony. So it found that investors are pricing in “a later liftoff date” for rate increases and a slower pace of tightening than FOMC participants themselves. That disconnect could cause financial instability. Read….. To Avert Sudden Market Collapse, the Fed Tries to Spook Utterly Unspookable Markets

2008 Bank Bailout Strikes Back

The 2008 bank bailout has been criticized for helping out Wall Street ahead of citizens, and we explore the perks that were extended to BofA, JPMorgan Chase, Goldman Sachs, Chase, Citigroup and Morgan Stanley, and how those banks have actually become more powerful as a result of their wrecking the economy. The fear tactics of the establishment warning of an imminent great depression, and how the American people were exploited for another payoff is discussed with Nomi Prins in this excerpt from the Buzzsaw interview.

U.S. Dollar: A Funny Thing Happened on the Way to the Crash

Fantasy About US Recovery Is Not Going To Materialize

Andrew Hoffman – Surprise! Central Banks Are CME’s Best Customers

from FinancialSurvivalNetwork.com:

Another Manipulation Monday with Andrew Hoffman. Listen in as we discuss:

Global economic collapse
European recession
France in outright collapse, Italy triple-dip recession, Spanish banks as insolvent as is Portugal
Japan’s massive economic data negative revisions this weekend
China housing bubble burst accelerates
ECB rate cuts and $1 trillion QE announced, starting October
NFP jobs: 142,000 vs. expected 230,000, and 0 manufacturing jobs
35 year low labor participation rate
New meme of U.S. QE ending and Japan/Europe accelerating, thus creating a “strong dollar”
Bombshell that CME boasting “governments” and “central banks” as customers, and offering volume discounts to them for overnight PM futures “trading”

Click Here to Listen

The looming Mergers & Acquisitions wave:

Tory fury as increasing aid budget becomes law: Conservative MPs ordered to vote in favour of proposed Bill

• Ministers today backed a bill making it legally-binding to spend 0.7% on aid
• Commitment means the Government will spend £12bn on aid next year
• Tory MPs said aid spending should not rise while defence was being cut
• One Conservative MP described it as a 'sop' to 'Guardian-reading liberals' 
• But Lib Dem MP introducing the bill insisted it was 'the right thing to do'
• Gordon Brown broke off campaigning in Scotland to back plan in Commons

By Jack Doyle for the Daily Mail and Tom McTague, Deputy Political Editor for MailOnline

A law which would force future governments to increase Britain’s bloated aid budget was voted through last night in the face of furious opposition from backbench Tory MPs.

Crucially, Conservative MPs were ordered to vote in favour of the proposed law, which would make the Government’s controversial policy of spending a minimum 0.7 per cent of national income on international aid a legal requirement.

It means Britain’s aid budget – which is already £12billion a year – will continue to grow if the economy grows, unless the law is repealed. 

Last night, one furious MP described it as a ‘sop’ to ‘Guardian-reading liberals’.

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Ministers today backed a Lib Dem proposal to enshrine in law the Government's commitment to spend 0.7 per cent of GDP on foreign aid. Supplies of UK aid were dropped over northern Iraq last month to help fleeing Yazidis cornered by ISIS terrorists

But Government support for the Bill, which was proposed by a backbench Liberal Democrat MP and is also backed by Labour, means it is much more likely to become law.

Significantly, it could also derail attempts by Tory MPs to pass into law a Bill for an EU referendum in 2017 by taking up limited debating time. 

A Liberal Democrat Bill on the ‘spare room subsidy’ is already on its way to the House of Lords and after yesterday’s vote, supporters of the EU referendum Bill will find it much more difficult to find the time to debate it.

 

A group of Tory backbenchers furiously opposed the aid Bill, warning about the dangers of waste and corruption in aid spending. 

Conservative MP for Shipley, Philip Davies, described the Bill as ‘gesture politics of the worst possible kind’. 

He added: ‘If you criticise Britain’s huge, often mismanaged, aid budget you are accused of not wanting to help the neediest in the world. [The Bill] says we are going to spend the same amount of money every single year in perpetuity.

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Tory MP Philip Davies said the Bill was only going through Parliament to 'make a few middle-class, Guardian-reading, sandal-wearing, lentil-eating do-gooders' feel better about themselves

‘That is basically an acceptance that our assistance will fail, that it will not turn around a country’s fortunes or deal with the causes of poverty, and that it will just be a hand-out to make a few middle-class, Guardian-reading, sandal-wearing, lentil-eating do-gooders with a misguided guilt complex feel better about themselves. 

'It will do nothing to alleviate the real causes of poverty in those countries.’

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Former Scotland Secretary Michael Moore introduced a private members bill today calling for the Government to commit to spending a minimum amount on foreign aid

He said that at a time of national austerity, huge increases in aid spending ‘at the same time as we have been making the case that we have got no money is completely and utterly ridiculous’.

Tory backbencher Sir Gerald Howarth asked why international aid spending was being singled out when defence spending was ‘allowed to go hang’. 

Sir Edward Leigh said Conservatives should be ‘judged not by how much we spend on something but by the value for money of what we achieve’.

However, International Development Minister Desmond Swayne backed the Bill, saying Britain’s aid spending could help reduce the number of migrants trying to arrive here from Calais.

He said: ‘There are all sorts of arguments to be had about whether it should be 0.7 per cent and a long debate might be had on that basis.

‘Indeed, we might be having one today ... but all I can say that as an elected politician I feel myself bound by commitments that I have made and I made a commitment at the last general election to 0.7 per cent.’

The Tory minister deflected criticisms from some of his own backbenchers, fighting off the claim that ‘charity should begin at home’.

Mr Swayne insisted international development aid is not charity, it is taxpayers' money spent in the national interest on things such as vaccination programmes for children.

He said: ‘Charity is what you dip your hand into your own pocket and distribute.

‘Taxpayers' money is taken from your pocket without your leave, with all the coercive power of the law behind it.

‘And it is essential therefore that it is spent in the national interest.’

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Back from Scotland: Former prime minister Gordon Brown broke off from the independence referendum campaign to back the plans in Westminster today

Labour’s shadow development secretary Jim Murphy and former prime minister Gordon Brown broke off from the independence referendum campaign in Scotland to back the plans in Westminster today.

Mr Murphy said: ‘For all the dry language of spending targets, goals, statistics and shortfalls to a scale of millions and billions, it is important not to forget what official development assistance is really about.

‘We live in a world where one million babies a year die on their first and only day of life. One in eight people go to bed hungry each and every night. 1.5 billion people are trapped in the brutality of conflict-affected and fragile states. 58 million children are unable to go to school and 20,000 under-five-year-olds die every year of easily curable diseases.

‘British aid works. The support we give changes lives.’

The Bill was tabled by former Scottish secretary Michael Moore, who said it would deliver ‘for the poorest in the world’. The Bill, which was voted through by 164 to six, now goes to committee stage and then to the House of Lords.

All three major parties pledged to support the aid target in their manifestos, and it was part of the Coalition agreement.

The last Labour government made law legally-binding targets for child poverty and climate change. The 2008 Climate Change Act included the target of reducing the UK’s greenhouse gas emissions by at least 80 per cent from its 1990 level by 2050. A 2010 law set a target of ‘ending child poverty’ by 2020.

It is thought that any government not meeting the targets as set out in law could face a legal challenge requiring it to do so.