Prometheus 6

14,000 reasons to be skeptical
Corporate takeovers -- not a strong, stable economy -- are fueling Wall Street's latest bubble.
By Eric J. Weiner
ERIC J. WEINER is the author of "What Goes Up: The Uncensored History of Modern Wall Street as Told by the Bankers, CEOs, and Scoundrels Who Made it Happen."
July 20, 2007

THE DOW JONES industrial average closed above 14,000 for the first time Thursday, a historic, if puzzling, milestone.

Most finance experts agree that stock markets thrive during periods of steady economic growth and political stability. But today's economy hardly is clicking on all cylinders, and the geopolitical landscape has never seemed more perilous. So what's driving this market to such heights? In a word: takeovers.

Wall Street is in the midst of a raging leveraged buyout boom that makes the "greed-is-good" 1980s look like the Great Depression. Leveraged buyouts are Wall Street's version of "Flip This House": Borrow a bunch of cash to buy a company, dress it up by scrubbing the books and streamlining the operation, and resell it all for a tidy profit.

In the second quarter of 2007, companies around the world bought and sold an unprecedented $1.65 trillion worth of businesses, 90% more than during the same three-month period of 2006. At this pace, global corporations should easily surpass the previous annual merger record of $3.6 trillion worth of deals, which was set just last year. The market has gotten so crazy that notoriously secretive buyout partnerships such as Blackstone Group and Kohlberg Kravis Roberts & Co. actually are cashing in by going public.

The fuel for all this buying and selling is cheap debt supplied by major banks and lenders. Desperate for a seat at the lucrative takeover table, they're willingly handing out gobs of money, with practically no strings attached, to anyone even contemplating a buyout.

As a result, the market is rife with stock speculation, because practically every company is a potential takeover target. Just ask Dow Jones & Co., which essentially is being forced into a deal by an overwhelmingly generous unsolicited bid from Rupert Murdoch's News Corp. The merger guessing game has pushed countless stocks to all-time highs and is propping up most major indexes. Indeed, beyond the Dow, which already has gained 12% in 2007, the S&P 500 index is up nearly 10% and the Nasdaq composite index is up more than 12%.