The LBO Bubble Bursts: Not Necessarily a Bad Thing

"That was a popping sound," writes Andrew Sorkin in today's NYT, and although such sentences have a tendency to generate another type of sound entirely from their more sophisticated readers, he's actually right this time. For he's not talking about the stock market's intraday volatility – the big news which made the front page and which really isn't news at all. Rather, he's talking about the fact that the credit markets in general, and the LBO market in particular, have now "slammed shut".

The abandonment of the proposed $15 billion sale of Cadbury Schweppes's North American beverage unit is just the latest datapoint confirming this: anybody who wanted to sell out to private equity buyers is going to have to wait, now, probably at least until September. I got an email yesterday from a friend in the M&A industry: "the LBO engine has completely shut down at least for the rest of the summer, I'm hearing". Inevitably, the proposed IPO of KKR is going to be postponed. And every major Wall Street bank is going to be left holding some rather radioactive junk debt, Cerberus-style.

But the good news is that the stock market is still looking reasonably healthy: it's worth remembering that the S&P 500 is still up more than 16% from where it was a year ago. For all the billions that private-equity shops were able to throw around until now, most of the stock market is still comprised of relatively unlevered and profitable companies which should be able to weather a credit-market contraction without any difficulty. Steve Schwarzman might not be a happy bunny today, but I don't think Warren Buffett is losing any sleep.

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