Are Companies Wasting Money and Laying Off Their Employees Too?
Bloomberg News reports:
May 24 – Bloomberg (Lisa Abramowicz): “Speculative-grade companies are accelerating bond sales to finance acquisitions and leveraged buyouts as U.S. private-equity takeovers surge 76%. About $4.7 billion of last week’s high-yield, high-risk bond offerings were to pay for purchases and LBOs, the greatest amount since October, according to JPMorgan.
With interest rates being so low, it makes sense for companies to borrow (i.e., selling bonds) - if they really need the money, that is.
Here's a question:
Are companies accelerating their borrowing to seal deals now that they were going to do anyway? Or are they borrowing first, then looking for deals? There's a difference.
If the former - and borrowing is the best way to acquire something, vs. paying cash or using equity - then it's just prudent to borrow at the lowest rate.
But if it's the latter, then it's not so prudent. In that case, companies figure, what the hey, let's grab this cheap money; there's bound to be something worthwhile to spend it on.
The problem with that is there very well may not be anything really worthwhile. But the cheap money will skew their judgment and they'll think the deal's good. Another way to look at this is that the cheap money makes a deal look cheap, but just because it looks cheap doesn't make it a good deal. It would be like you using your credit card to buy something because you get some card deal where they don't charge you interest for a year or something like that. People do stuff like this and maybe buy something they don't really need, and then think they got a good deal.
Are companies as dumb as people? Sure they are. It happens all the time.
So this is one way the Fed - by keeping interest rates low - causes what's known as "misallocation" of capital. Companies will wind up spending money (capital) on something that's really not worth their while, not good for the company, not good for shareholders, etc.
Now here's something to think about. You know how the Fed has kept interest rates low for years now? What if lots of companies are making these bad decisions - misallocating capital - and have been doing it for years? Doesn't that mean that lots of money - probably billions of dollars - has been spent on deals that won't pan out? If that's been happening, then companies have wasted lots of money just at the time when they should have been more careful with their money - you know, in the midst of the economic and financial crisis of our lifetimes.
And what's this? It looks like big corporations are starting to lay off again. Things aren't working out the way they thought they would. So it's possible that they're wasting money and laying off employees at the same time.
Doesn't it just seem like common sense to be careful and prudent at a time like this?
Then again, I'm no financial "whiz," so what do I know?
May 24 – Bloomberg (Lisa Abramowicz): “Speculative-grade companies are accelerating bond sales to finance acquisitions and leveraged buyouts as U.S. private-equity takeovers surge 76%. About $4.7 billion of last week’s high-yield, high-risk bond offerings were to pay for purchases and LBOs, the greatest amount since October, according to JPMorgan.
With interest rates being so low, it makes sense for companies to borrow (i.e., selling bonds) - if they really need the money, that is.
Here's a question:
Are companies accelerating their borrowing to seal deals now that they were going to do anyway? Or are they borrowing first, then looking for deals? There's a difference.
If the former - and borrowing is the best way to acquire something, vs. paying cash or using equity - then it's just prudent to borrow at the lowest rate.
But if it's the latter, then it's not so prudent. In that case, companies figure, what the hey, let's grab this cheap money; there's bound to be something worthwhile to spend it on.
The problem with that is there very well may not be anything really worthwhile. But the cheap money will skew their judgment and they'll think the deal's good. Another way to look at this is that the cheap money makes a deal look cheap, but just because it looks cheap doesn't make it a good deal. It would be like you using your credit card to buy something because you get some card deal where they don't charge you interest for a year or something like that. People do stuff like this and maybe buy something they don't really need, and then think they got a good deal.
Are companies as dumb as people? Sure they are. It happens all the time.
So this is one way the Fed - by keeping interest rates low - causes what's known as "misallocation" of capital. Companies will wind up spending money (capital) on something that's really not worth their while, not good for the company, not good for shareholders, etc.
Now here's something to think about. You know how the Fed has kept interest rates low for years now? What if lots of companies are making these bad decisions - misallocating capital - and have been doing it for years? Doesn't that mean that lots of money - probably billions of dollars - has been spent on deals that won't pan out? If that's been happening, then companies have wasted lots of money just at the time when they should have been more careful with their money - you know, in the midst of the economic and financial crisis of our lifetimes.
And what's this? It looks like big corporations are starting to lay off again. Things aren't working out the way they thought they would. So it's possible that they're wasting money and laying off employees at the same time.
Doesn't it just seem like common sense to be careful and prudent at a time like this?
Then again, I'm no financial "whiz," so what do I know?
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