Where Buyers Should be Looking

There was an interesting exchange just now on the deals panel, between Jim Casella, of Case Interactive Media, and Michael Wolff. If you have cash right now, said Casella, it's a great time to be a buyer. This has been a very common theme of late, especially from private-equity types and value investors: the more that valuations fall, the more attractive they become.

But Wolff responded: if you have cash right now, that's probably because you're prudent. And if you're prudent, there are other things you can do with cash beyond making strategic acquisitions: specifically, you can buy back your own debt, which is probably trading at a 16% yield.

More generally, any decision to buy equity will involve either a majority or a minority stake. If you're a minority investor, doing something like buying public shares, then to a large degree you're at the mercy of the market -- and the market as a whole doesn't have cash to spend. That means your company might not be able to refinance its debt, and that it will end up being taken over by its creditors. On the other hand, if you're interested in buying companies whole, the opportunity space is large, and there's free money to be made by doing things like buying back your own debt at levels significantly lower than where it was issued.

To put it another way: while equity valuations are cheap right now, debt valuations are cheaper still. And anybody looking at companies has to look all over the capital structure -- not only of potential acquisitions but also of their own company.