Goldman Sachs was feeling its pop lit oats on Friday, when it sent out client research titled "Hung Bridges and The Deathly Hallows." It included such gems as:
But like J.K. Rowling’s protagonists, the battle between investor sentiment and company fundamental will continue until the demise of one of the participants.
It is impossible even for a wizard like Harry Potter to reconcile two facts: Stocks cannot BOTH melt down because the market fears financial institutions will have to fund and hold levered loan commitments while at the same time shares of target companies sell off on the belief the same transactions will not close.
That last line led to Goldman’s primary recommendation: That folks should buy stock in the 22 listed companies that already have agreed to go public -- many of which are currently trading below their buyout price. For example, Alliance Data closed Friday at $75.33 per share, even though Blackstone has agreed to buy it for $81.75 per share. And I tend to agree, but for a different reason than Goldman.
My reason is simple: I don't believe the banks will bail, due to the pending breakup fees, legal fees and reputational fees. A few deals might fall apart, so consider the 22 as a bucket best kept whole.
Goldman, however, sets up a false choice: Investors cannot simultaneously believe that:
(1) Banks will make bad loans to fund LBO deals, which is why the overall market is tanking.
(2) Banks won't make bad loans, which is why target company prices are sliding.
But that’s assuming that it’s the same investors making both bets. What if average investors have lost faith that future take-privates will get done, thus lowering the artificial markups based on the dream of future LBO premiums – while investors in the 22 stocks are simply hedging their bets after having gotten substantial gains? In fact, I think that's exactly what's happening.
*** Even if the Golden Age of Buyouts is over -- or at least on vacation until Labor Day -- it's not as if the market will disappear. Remember, deals got done back when lenders were stingier -- and there is exponentially more dry fund powder today. Returns may go down, but the market will survive just fine. (that's right, I'm not bearish, just a contrarian)