MacFadyen: Blame Leverage
September 8, 2009
Reuters’ Matthew Goldstein last week trotted out a commentary calling on regulators to “take the L out of LBO.” He began his <a href=" http://blogs.reuters.com/commentaries/2009/08/31/take-the-l-out-of-lbo/">blog</a>, stating: “In a perfect world, we would simply ban leveraged buyouts,” and within a few paragraphs proposed rules capping leverage to 50% of the purchase price.
I initially thought I knew where Goldstein was going, but he took a leap I didn’t really expect.
Let's take it a step further, and imagine for a minute a world without any leverage at all. Gone are the bankruptcies and the painful cost-cutting many have come to associate with leverage. But we're left without any real growth. We're effectively living in a world without leverage right now, and capital expenditures are being put off, job growth has gone in reverse, and salaries are getting ratcheted lower. Also, nobody wants to sell, because valuations are so low. That means assets wallow as either a division of some larger parent company or in the hands of an entrepreneur who is only thinking about retirement or his or her next big idea.
I've written about the idea of <a href="/maj/20070801/32217-1.html">sustainable borrowing</a> in the past, and I agree with a good portion of Goldstein's argument. That being said, the unintended consequences of his proposal would be much worse than the solution it provides. It's the old "eradicate the mosquitoes" solution that doesn't consider its role in the food chain.
Goldstein, himself, jumped to Thomson Reuters from BusinessWeek. The former took on $7 billion-plus in debt to complete the Thomson/Reuters merger, while the latter -- owned by McGraw Hill -- is hoping that someone will save assets and keep the magazine in print. BusinessWeek's blog reported that private equity firms Platinum Equity, ZelnickMedia, OpenGate Capital and Warburg Pincus are among those showing interest.
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