Lest we forget, the stock market is in thrall to forces beyond rich baby boomers, tassel-shoed pension jockeys and panicked Japanese. Biding in Wall Street's shadows are buccaneers from the 1980s, cash raked up to their Ferragamo belts, ready to lunge.
Leverage-buyout firms once were famous for using borrowed money to buy RJR Nabisco, Federated Department Stores and other big outfits. But they've sat in the dugout for years, immobilized by sticker shock. When public-company prices double and then double again over a few years, even gimlet-eyed LBO trolls can't in good conscience fill the shopping cart.
The recent blue-light special on U.S. firms, however, may give LBO artists their lead.
"A lot of buyout firms think this is a huge turning point," said Kopin Tan, editor of Buyouts, a New York-based newsletter.
"I can tell you that everyone has high expectations now."
Prices of big-company stocks have been discounted more than 15 percent in recent months as investors worry about future profits and the world economic slough. Small-company stocks are off by almost 30 percent. If values stay where they are, and especially if they fall more, LBO firms may swoop.
Big buyout shops such as Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst "are probably looking at opportunities as we speak," said Sandy Stewart, head of private finance at Baltimore's Legg Mason Inc. and shepherd of leveraged deals involving smaller, private businesses. "There's all kinds of cash available. They've got all the money in the world. And they're willing to spend it."
U.S. buyout firms perch on at least $100 billion in cash, pent up from years of subscriptions with nowhere to go. European players hold billions more. Denominated in dollars, deutsche marks and pounds, the hoards have gained value as the rest of the planet's assets -- gold, oil, stocks, junior currencies, Boston Market franchises -- have lost it.
LBO funds had more than a little to do with stocks' ascent in the 1980s. With each multibillion-dollar deal, KKR and its cousins "unlocked" corporate treasure, rendered implicit values explicit and opened eyes across Manhattan.
Takeover rumor alone would boost whole categories of stocks. Buyouts also cut the supply of publicly traded companies, boosting prices for those that remained.
Whether buyouts helped the country or their object businesses is debatable. Groaning under government-subsidized debt, captive companies sent profits to junk-bond holders instead of investing in employees and equipment.
But LBOs' effect on stocks is proven.
Don't forget the "leverage" part. With $100 billion for down payments, U.S. funds can buy companies worth close to half a trillion dollars at today's financing ratios. Borrowed money makes up the difference, although bank debt seems to have gained favor over junk bonds. And as interest rates fall, deals become even more affordable.
LBO pros probably won't strike on Monday.
Like many, they'll wait until the stocks and the economy calm. Even then, a severe recession and long-term threat to corporate profits would freeze even liquid firms itching for deals. Some capital may get shunted to vulture funds overseas, where corporate values make the deflated U.S. stock market look like Neiman Marcus.
But cash is king again on Wall Street, and the leverage funds have it, along with corporate treasurers who continue to busily buy back their shares. The half-trillion potentially commanded by LBO groups equals what mutual-fund investors pumped into stocks in 1996 and 1997, sending the Dow industrials up 60 percent.
It may offer support for falling stocks that the investment community hasn't thought much about yet.
Pub Date: 9/13/98