Private equity firms

brian · #1 (**permalink**) 05-14-2006, 01:41 PM

Interesting article at the BBC on private equity firms:

http://news.bbc.co.uk/1/hi/business/4954060.stm

Quote:

Much of the rise in share prices that has taken place over the past three years has resulted from companies merging or being bought out.

Private equity firms have been behind much of this wheeler-dealing.

These firms use investor cash to seek out undervalued companies and assets and to improve the effectiveness and success of the targeted companies.

As for the frenzy of private equity, the figures are mind-boggling.

Virtually 80% of the FTSE 100 is being talked about publicly as being involved in mergers, acquisitions and buy-outs.

Borrowing by private equity firms currently stands at £680bn, equivalent to 43% of the total value of all the companies listed on the FTSE 100.

Such behaviour in the past went by a far less attractive title, which few ever dare repeat today: asset-stripping

Sounds like a pretty damning report on the practice, but what I find curious is the suggestion that recent rises in stock prices have been primarily dirven by private equity firms taking over and restructuring companies.

Would that really be a fair appraisal?

feline · #2 (**permalink**) 07-08-2006, 03:51 PM

Does that mean that since these companies have spent much in merging/buying other companies, this is the reason why they are rising the share prices, having the consumers pay for it all? Would it really mean being stronger when two companies merge as one and as such, shares of stocks are going to be higher than the usual?

brian · #3 (**permalink**) 07-11-2006, 11:39 AM

Well, it seems to be a demand issue - so long as private equity firms are hunting companies, the stock goes up the moment they're targeted.

Then the equity company rips out the assets, sacks a number of workers, then resells what's left as a more "efficient" and profit-making company with a higher stock value due to p/e.

2c.