Corporate lenders see a silver lining in the recent decline in the stock market.
Cheap stock prices should increase the demand for acquisition loans to leveraged buyout firms, which have accumulated a significant amount of surplus equity lately.
Bankers estimate that the amount of capital available for leveraged buyouts is between $40 billion and $50 billion. They estimate this capital can be leveraged at a 4- or 5-1o-1 ratio.
For the fourth quarter, "we expect to be extremely busy as a result of a lot of acquisition financings," said James Lee, senior managing director of Chemical Banking Corp.
Experts attribute the size of the available equity reserves to fund-raising and good performance from pension funds, college endowments, state retirement funds, and a strong initial public offering market.
The IPO market in particular has helped many of these investments accumulate money, which they are now preparing to spend.
"There's a lot of equity on the buyout side," said Chad Lent, the managing director of syndications at Chase.
"The market for private equity acquisition financings has improved as public market multiples and alternatives have declined," added Mr. Lee.
Players refer to mergers involving buyout firms as "financial" acquisitions, as distinguished from "strategic" acquisitions in which firms build their market share.
And Chemical expects the financial acquisitions to be a major factor in loan demand.
A number of LBO firms already have taken advantage of available equity and banks' readiness to lend by actively acquiring companies.
In the media industry where there are plenty of strategic acquisitions under way, Forstmann Little, a financial acquirer, bought Ziff Davis Publishing recently, in an approximately $1.4 billion deal led by Chemical.
"The banks are far more competitive today than they have been," said Richard Paterson, a director of Genstar Capital Corp, a Toronto-based LBO firm.
"The type of deal that can be struck with a bank today is certainly better than it has been."
Genstar recently completed a $90 million leveraged buyout of Canada's largest tug and barge company, Seaspan International, with financing from TD Capital Group Ltd., a subsidiary of Toronto Dominion Bank.
Some LBO firms expect that the larger strategic acquisitions will create opportunities for financial deals later.
Businesses in industries that have shown consolidation, such as health care, will probably divest some of their smaller affiliated companies.
"There will inevitably be opportunity for financial buyers resulting from the pieces of corporate mergers," said Jonathan Sokoloff, a general partner at Leonard Green & Partners.
Some think the larger deals will tend to be strategic, and the smaller ones will be made by financial buyers.
However, others point to the fact that the largest acquisition in history was made by a financial buyer, KKR, when it bought RJR Nabisco for $25 billion in 1989.
This year, synergies in consolidating industries and a strong stock market have driven some of the strategic cash- or equity-based mergers and acquisitions. Stock market watchers in this community, however, expect a continued weakening of the IPO market, as well as a weaker stock market.
LBO firms think that when the economy slows, opportunity knocks.
"The combination of the flurry of corporate acquisitions this year, higher rates and a slowing economy will create more opportunities next year for buyout firms," said Mr. Sokoloff.
A weakening economy is not expected to cause a return to the overleveraged days of the late '80s.
LBO firms tell investors that they are taking at least t5% equity positions in their acquisitions, compared with the 5% to 10% that was typical during the 1980s' buyout boom.