The Coming Leveraged Buyout Boom

A blog about business and economics.
Feb. 8 2013 10:37 AM

A Great Time To Borrow a Few Billion


Ever have that sinking feeling that you’re not saving enough for retirement? Well, if there are any banks out there prepared to lend you a few billion dollars you might want to consider going deeper into debt and buying a medium-sized, publicly traded corporation. That’s the moral of the Matthew Klein chart posted above.

The blue line is the “earnings yield” of the S&P 500 as a whole. A company’s earnings yield is its profits divided by the price of all its market capitalization. Think of it as the return you would earn if you bought up all the stock in the company. The red line is the prevailing interest rate on risky “junk” bonds. We are today in a very unusual situation, where the junk bond yield is lower than the yield on the average publicly traded company. That suggests that good leveraged buyout opportunities are all over the place, and you wouldn’t necessarily even need any genius turnaround plans to make them profitable. Now probably no bank is going to lend you the billions you would need (sucks for you) but that’s great news for private equity players who have what it takes to put a deal together. Hence Klein’s forecast that Dell is likely to be just the beginning and “we may see more big leveraged buy-outs if this unusual spread persists.”

The chart, however, very nicely illustrates what I think is one of the big mysteries of corporate finance. Why don’t more public firms do the leveraging for themselves? Why wait for the buyout?

After all, the most simplistic LBO strategy—load a company up with debt to render its capital structure more tax efficient—should be available to just about anyone. You’d think this would be particularly attractive since a Microsoft, say, can borrow money at a considerable discount to the junk rate. Don’t get me wrong, it’s probably good for the world that healthy non-financial firms don’t go around borrowing tons of money to finance huge stock buybacks. But executives do things that are bad for the world all the time.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The Irritating Confidante

John Dickerson on Ben Bradlee’s fascinating relationship with John F. Kennedy.

My Father Invented Social Networking at a Girls’ Reform School in the 1930s

Renée Zellweger’s New Face Is Too Real

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

The All The President’s Men Scene That Captured Ben Bradlee

Medical Examiner

Is It Better to Be a Hero Like Batman?

Or an altruist like Bruce Wayne?


Driving in Circles

The autonomous Google car may never actually happen.

The World’s Human Rights Violators Are Signatories on the World’s Human Rights Treaties

How Punctual Are Germans?

  News & Politics
The World
Oct. 21 2014 11:40 AM The U.S. Has Spent $7 Billion Fighting the War on Drugs in Afghanistan. It Hasn’t Worked. 
Oct. 21 2014 5:57 PM Soda and Fries Have Lost Their Charm for Both Consumers and Investors
The Vault
Oct. 21 2014 2:23 PM A Data-Packed Map of American Immigration in 1903
  Double X
The XX Factor
Oct. 21 2014 1:12 PM George Tiller’s Murderer Threatens Another Abortion Provider, Claims Right of Free Speech
  Slate Plus
Behind the Scenes
Oct. 21 2014 1:02 PM Where Are Slate Plus Members From? This Weird Cartogram Explains. A weird-looking cartogram of Slate Plus memberships by state.
Oct. 21 2014 12:05 PM Same-Sex Couples at Home With Themselves in 1980s America
Future Tense
Oct. 21 2014 4:14 PM Planet Money Uncovers One Surprising Reason the Internet Is Sexist
  Health & Science
Climate Desk
Oct. 21 2014 11:53 AM Taking Research for Granted Texas Republican Lamar Smith continues his crusade against independence in science.
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.