Value Of Broken Buy-Outs Moves Above $200 Billion

Just when it appeared that there could not be much more bad news in the financial sector, new information shows that there will be over $200 billion in broken buy-out deals this year. That is double last year’s number.

According to the FT "there have been 76 abandoned deals worth $202.3 billion so far in 2007.

The trend points to several problems. The first is that the signs that the credit markets are getting worse are getting another boost from the news that LBOs cannot be financed.

But, just an important, the shares in the public companies that have been buy-out targets are falling sharply, causing billions of dollars in shareholder value to disappear. The market cap of Sallie Mae (SLM) is down $5 billion since its buy-out deal was announced and then dropped. There are dozens of these failed LBOs, although most are not as large as the one for the student loan company.

Another effect of the broken deal pattern is that large banks and lending institutions, which took on debt for LBOs that still have the green light, may have to keep that debt on their balance sheets. Broken deals almost certainly make institutional investors more careful about buying bonds in the deals that barely made it through. The chain reactions leaves big financial institutions with more potential write-downs in addition to those created by the mortgage mess.

No good news here.

Douglas A. McIntyre