Things are changing in the financial markets. Financial institutions are starting to make money again in mortgages. Money market funds are "flush with cash." Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are staging a comeback.
And, now there is the $24 billion deal by Michael Dell to take his company private. The interpretation of this transaction that I am most interested in is the one being mentioned in almost all the stories coming out in the press: "This is the largest corporate privatization since the financial crisis and the largest tech buyout ever."
I am not interested so much in whether or not Dell, Inc. (NASDAQ:DELL) is eventually saved. What I am interested in is what is happening in finance. It appears as if money is being mobilized again.
Goodness knows, the Federal Reserve has done just about everything it can to push money out into the economy. Comedians have gotten serious about QE1 and QE2 and QE3 … and QEfinity!
It has only been in the past six months or so that there has been any evidence of funds creeping out of the commercial banking system into other parts of the economy. But now, evidence seems to be growing of money flowing into other parts of the economy. This latest transaction, the creation of a large buyout deal, with the growing possibility that others are thinking about more deals, or even mergers and acquisitions, is very encouraging.
Over the past couple of years, myself and others have wondered about all the cash being built up in the coffers of large corporations. It seemed as if these large organizations were piling up cash hoards in preparation for moving in on less well-off institutions and making deals while the getting was good and while interest rates were so low.
But, economic growth was tepid and there was a great deal of uncertainty, especially about the regulatory/political environment. Merger and acquisition business picked up a little but was totally disappointing to some, myself included, as the quantity and dollar volume of deals fell far below expectations.
The cash came in for some use in the latter part of 2012 as the government's fiscal situation created an environment in which many companies either paid special dividends or engaged in stock buybacks. Now, however, something different seems to be in the air.
There seems to be a little more optimism in the air concerning the health of the economy. Economic growth is unlikely to accelerate much in the coming year, but consumer markets and housing markets seem to be picking up. Also, assuming more risk seems to be acceptable these days.
International investors seem to be moving out of their "safe havens", U.S. Treasury securities and German sovereign debt, and moving into riskier investments. After a one-day respite, the 10-year U.S. Treasury bond was trading today to yield above 2.00 percent again. This yield was around 50 basis points higher than where the bond traded in July 2012. The 10-year German bond, which also fell yesterday, resumed its rise, closing at 1.66 percent today, where it was trading to yield around 1.30 percent in early December. These movements seem to me to be just the tip of the iceberg.
Michael Dell got a lot of attention over the past couple of weeks as he attempted to push this deal through. Some substantial players expressed interest. Microsoft put $2 billion into the deal and will get a board seat. Now, Michael Dell seems as if he has pulled it off. The fact that deal is happening and that this size of deal can be financed can only be encouraging to others. I believe more privatization deals will take place this year.
And, I believe that we will finally see business in the M&A market pickup. I have believed for the past two to three years that there are quite a few hungry, financially well-off corporations that are poised to move on some of their less-well off brethren. These healthy institutions have just been waiting for the right economic environment and a reduction in the uncertainty that has plagued the atmosphere.
In addition, these corporations have been waiting for others to begin to move, first, because seeing others move increases confidence, but also, because if others are moving, the well-off corporations cannot be criticized for making the acquisitions because of the fact that if they are wrong they always have the excuse that others were making acquisitions as well.
Federal Reserve officials must be happy in seeing these things happen. Although commercial banks, at least those banks smaller than the largest twenty-five or so, are not taking on much "new" business, the efforts of the central bank to push large amounts of money into the financial system as a whole finally seems to be having some positive effects.
Although these positive results may not be immediately speeding up economic growth, they can only be seen as favorable in the Fed's efforts to restore the economy to a sounder footing. We have to see the financial system functioning well before we will see the economy becoming more robust.