Merger Mania -- Good Thing or What?

[Donner]

Got a chance to see the happy talk maven Maria Bartiromo on NBC news over the weekend. She was gushing over the latest rash of merger activity. She sees it -- and pushes it -- as a sign of strength in the economy and by extension the markets. "It's a sign of confidence in the economy by CEO's who are willing to crack open their pocketbooks to blah, blah, blah..."

We are going to see more mergers, large and small, acquisitions, IPO's, secondary offerings, debt refinancing, junk bond issues, and every manner of capital utilization scheme imaginable as we advance in this business cycle. Why? Because businessmen have a lot of confidence in the economy and the prospects of particular businesses? Sorry, Maria, afraid not.

We are witnessing Merger Mania not because business is looking so great down the line but because CAPITAL IS DIRT CHEAP! CFO's and CEO's and every other kind of O's are taking advantage of the fact that scads and scads of capital is lying around unemployed and willing to work for peanuts. So, they are doing what comes natural to businessmen. If you can't grow your market share because of competitive pressures and sluggish worldwide demand then use the willingness of capital providers to work cheap to rub out the competition and grab its market share. The shark bites when the conditions are right and the opportunity presents. And conditions for going after the other guy ain't gonna get any better than they are right now. As the Burl Ives character in Cat on Hot Tin Roof , Big Daddy, said : " Life is a jungle, boy : "it's 'et or git 'et!" He was a pretty miserable character as I recall.

What's this got to do with anything real? Nothing, really, except that it is one more sign of swirling imbalances in the system which are going to have to be wrung out at some not too distant point. The users of capital are going to have to get back in balance with the suppliers of capital. How is that going to happen? Like the period 2000 -- 2003, a lot of excess world-wide capital is going to have to be destroyed. Like any other surplus commodity, capital will be metaphorically left in the fields to rot, burned, held off the market, thrown away, or, as at present, given away to anybody who will take it, cheap. Destroyed. You farmers out there can surely relate to this. Anybody for 1% 30 year home loans? The process of capital destruction had a grizzly start in 2000 - 2003 but today's merger mania and the IPO spectacle that we are going to witness in the remainder of this year is proof positive that the process is nowhere near complete. IMO the damage is done already. It simply remains to be fully "booked" in the most convenient, over priced and vulnerable asset line items.

I don't know about the rest of you, but I don't like thinking about my retirement capital as excess or surplus.

Donner