Mergers / Credit Crunch
With the markets in knots because of the “Credit Crunch”, or the “Money Meltdown”, or whatever cute name they want to call it, one thing that is being over looked is the affect of mergers on the whole situation.
Ontario Teachers Pension is in the process of trying to buyout BCE (Bell) and take it private. The $52 Billion deal requires the consortium to pull together $33 Billion in debt (63.5%!) Right now the deal is in jeopardy because the debt load is so high - not just the new debt, but also the existing debt.
My thought is: Should massive mergers/takeovers be allowed if they require massive debt to complete them?
I’ve got nothing against mergers. If someone has a butt load of cash and wants to buy an organization that compliments their existing business, then go for it.
The first problem with these “takeovers via debt” is that you normally end up taking two otherwise healthy organizations, merge them, and then the debt used to merge them weighs on the company, causing cash flow issues. That often leads to selling off bits of the company, or closing divisions and laying off people. In the end, you have a large company that is a damaged version of its former self.
The other issue is that when you tie up billions on these deals that becomes debt that can’t be leant for other things: mortgages, car loans, infrastructure projects, etc. These mergers almost never lead to growth or job creation, and at the same time are tying up money that could be used for more positive goals.
I think a rule should be put in place that you can’t process a merger if you require more than 30% debt to achieve it.
That may seem harsh, but when you look at things like the BCE/Teachers deal - requiring over 60% in debt is just irresponsible. After seeing some of the things that Wall Street has done that has led to the current situation, it shows that a little more regulation is needed to protect them from themselves.
Ontario Teachers Pension is in the process of trying to buyout BCE (Bell) and take it private. The $52 Billion deal requires the consortium to pull together $33 Billion in debt (63.5%!) Right now the deal is in jeopardy because the debt load is so high - not just the new debt, but also the existing debt.
My thought is: Should massive mergers/takeovers be allowed if they require massive debt to complete them?
I’ve got nothing against mergers. If someone has a butt load of cash and wants to buy an organization that compliments their existing business, then go for it.
The first problem with these “takeovers via debt” is that you normally end up taking two otherwise healthy organizations, merge them, and then the debt used to merge them weighs on the company, causing cash flow issues. That often leads to selling off bits of the company, or closing divisions and laying off people. In the end, you have a large company that is a damaged version of its former self.
The other issue is that when you tie up billions on these deals that becomes debt that can’t be leant for other things: mortgages, car loans, infrastructure projects, etc. These mergers almost never lead to growth or job creation, and at the same time are tying up money that could be used for more positive goals.
I think a rule should be put in place that you can’t process a merger if you require more than 30% debt to achieve it.
That may seem harsh, but when you look at things like the BCE/Teachers deal - requiring over 60% in debt is just irresponsible. After seeing some of the things that Wall Street has done that has led to the current situation, it shows that a little more regulation is needed to protect them from themselves.