Buyout Boom About to Burst?

Creeping interest rates may finally test the much-discussed recent run on mergers and acquisitions, according to The Wall Street Journal. That could be good news for some mutual fund investors.   For one thing, rising rates will increase the cost of borrowing. Standard & Poor’s leveraged commentary and data and Lehman Brothers data suggest that buyout companies are looking to sell as much as $250 billion in junk bonds in upcoming months to fund deals, while slumping stocks make sell-offs less attractive.   To make matters worse, pension plans, which had been investing in lock-step with private equity, seem to have pulled back, while shareholders at target companies have gotten more aggressive, increasing the premiums they demand.   Among those shareholders are mutual funds including Fidelity. In May, Fidelity forced equity firms Thomas H. Lee Partners and Bain Capital LLC to increase their bid for Clear Channel Communications. Highfield Capital Management, a hedge fund based in Boston, joined Fidelity in the fight.   Biomet, a company in Indiana which manufactures artificial hips, knees and shoulders, was offered a $10.9 billion buy-out from Blackstone Partners, Goldman Sachs Capital Partners , Kohlberg Kravis Roberts and Co. and TPG. After Institutional Shareholder Services led a challenge to the offer, the group of investors upped the ante by $500 million.   “Investors right now can’t imagine how the [leveraged buyout] boom would end,” said Richard Bernstein, a stock strategist with Merrill Lynch. But in a note to clients, he wrote that the confluence of rising interest rates and slowing stock markets “could do the trick.”   The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.