Curious Merger Math

This is an interesting article from Business Week on the unusual math that surrounds corporate mergers:

For six years private equity firm Thomas H. Lee Partners tapped the credit markets to buy one consumer-products brand after another and roll them all up into United Industries Corp. But even though United’s total debt jumped from $375 million to $860 million by 2005, its leverage—one measure of a deal’s riskiness—didn’t move much.
How could that be? Part of it was the magic of merger math, a naturally occurring phenomenon that has helped drive $1 trillion in buyouts since the boom began in 2004. It’s a pretty simple illusion that happens when a company with a lot of leverage buys one with less. That combined debt load is then spread across all the assets of the new corporate entity. So some key measures of leverage often remain the same or even drop, making it appear from one angle as though there were no additional risk. That can be true even if the acquirer pays the seller a premium, which is usually the case.

Posted by Eddy Elfenbein on August 7th, 2007 at 9:53 am

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