Where Have All the Raiders Gone?

With share prices at stomach-wrenching lows and a reasonably healthy high-yield climate, market watchers are anxiously waiting to declare a return to the era of the corporate raider. But instead, leveraged-buyout players have been strangely slow on the draw, while their cash has been piling up, uninvested.

To be sure, some vulturelike investors have saddled up. At press time, The Carlyle Group and Welsh, Carson, Anderson & Stowe were arranging as much as $1 billion in high-yield financing to fund their $7+ billion purchase of Qwest's directory unit. Following a number of similar deals this fall, it's no surprise that some observers were predicting a stampede of buyouts.

But experts say a return to a buying frenzy like that of the late-1980s is unlikely. For one thing, the current limited buying may be due more to pressure from fund investors to spend than to good opportunities. Uninvested LBO capital crept up to $123 billion in 2001, according to research firm Venture Economics. "It's tough to justify the amount of money they've raised if they're not investing it," says Robert Dunn, associate editor at Private Equity Analyst newsletter.

Leveraged buyers are also facing less-favorable terms. LBO firms parted with equity worth an average 41 percent of the deal price in the third quarter, according to Standard & Poor's Portfolio Management Data. "It's the highest in recent memory," says PMD's Marc Auerbach. In the late 1980s, the average fell to 10 percent.

Patient investors say that it's a seller's market. "I am seeing very few bargains--quite the opposite," says Frederick Iseman, chairman of $2 billion fund Caxton-Iseman Capital Inc.

Banking: Another Nick in the Wall
Wall Street just can't seem to get out of its own way these days. Even as the scandal over the breakdown of the wall between research and investment banking continues to cast a dark cloud over large banks, another gathering storm threatens to further weaken their credibility.

This time it's the commercial lenders that stand accused. Regulators are looking into allegations that banks are making loans contingent upon the corporate borrower's ability to provide other fee-based business, such as cash-management services or investment banking. The illegal practice, known as "tying" or "pay to play," is said to be widespread among commercial banks.

The National Association of Securities Dealers launched an investigation into tying after it received complaints from corporate borrowers. Although NASD won't comment on the investigation, it did issue a notice warning member banks that tying arrangements are against the law. "NASD is concerned that the practice of tying commercial credit to investment banking is becoming increasingly widespread," it said.

According to the Association for Financial Professionals, tying is endemic. It surveyed 3,500 financial officers and found that 48 percent believed that "if they didn't award other business to short-term lenders, the amount of short-term credit would be reduced." And 39 percent said they didn't expect to get loans at all if they didn't award other business to lenders. "It's very much a real issue," says James Haddad, a member of the AFP's board of directors and vice president of finance at Cadence Design Systems Inc., a San Jose, Calif., software firm. "I've seen it throughout my career [in finance]. Every company sees it. Banks aren't bashful about letting you know they expect loans to bring in other business."

The treasurer of a Fortune 500 company who asked to remain anonymous agrees that tying has created headaches for corporate borrowers. (Most finance executives won't talk about the problem openly, for fear of damaging their banking relationships.) "It's nothing official--they don't ask you to sign anything," says the treasurer. "But it's understood that creditors are trusted to get their share of other banking business. That's just the way it is." The treasurer was forced to move the company's lock-box business to a new bank after the company secured a new line of credit with that bank, even though the finance executive preferred the existing one. The treasurer blames the practice on the low-interest- rate environment, explaining, "Banks don't want to lend money anymore."

The practice of tying could have grave consequences for the economic system, says Haddad. He says that plenty of large banks made big loans to companies based more on what fee-based business the loan could generate than on the creditworthiness of the borrower. That practice has already contributed to large losses in loans made to technology and telecom firms--losses that could affect the rates and terms of credit for companies at large. "Effectively, banks look at lending as a loss leader," says Haddad. But when they make bad loans to a company like WorldCom based on how much other business they can get, the backlash has an impact on all companies. "Everyone ends up paying higher fees and rates," he adds.

Rep. John Dingell (D- Mich.) is urging the Federal Reserve to crack down on tying. In a letter to Alan Greenspan, Dingell said he was "concerned about the implication of these practices on the health of the financial markets and on the availability of credit to U.S. corporations."

• 1
• 2
• next »