IMF chief Rodrigo Rato said on Friday he feared corporate marriages built on big debts in a recent spate of mergers could end in tears. Rising interest rates could spell trouble for more highly leveraged mergers and acquisitions, he said.
"This merger mania...could be a show of complacency," Rato told reporters at the G8 summit of industrialised nations. His comments coincided with a tumble in the bond and share markets as investors took fright on Friday over the risk of interest rates rising more than they have been expecting.
They came just weeks after Britain's biggest pharmacy chain, Alliance Boots, published details of how it would be bought by Kohlberg Kravis Roberts in an 11.1-billion-pound ($21.8 billion) deal which is Europe's largest leveraged buyout, and the first private equity acquisition of a FTSE 100 blue chip company.
Rato said higher interest rates had already caused problems in areas of the mortgage industry, referring to recent repayment defaults and company collapses in the higher-risk end of the US mortgage market.
"We could see more of that in the mortgage market and other financial areas as monetary conditions tighten around the world," Rato said. He said he was not condemning big mergers but a danger that was inherent in some that relied heavily on debt finance, which costs more to carry when interest rates rise. "Some big mergers pose risks," he said. "This is not to say mergers are not good. But I think regulators should be careful".
Rato said higher food prices compounded inflation risks already lurking as a result of five years of bumper economic growth at global level and persistently high energy prices.
The International Monetary Fund forecasts global economic growth of a healthy 4.9 percent this year and next after a bumper 5.4 percent in 2006, continuing a five-year run which is the best in 30 years, according to the IMF. Rato backed central bank moves towards tighter credit.
"Centrals banks should be vigilant to inflation pressures," he said. For now, there are few signs of the global economy slowing, as Rato himself repeated. And credit is still cheap enough to maintain a seemingly relentless flow of corporate deals.
After a record 2006, mergers and acquisitions activity is still flourishing and global equity markets have been setting one record after another in recent weeks.
Bonds and stocks fell on Friday on fears of higher rates. Surging yields on bonds marked the end of bond-buying spree of more than five years. Stock markets took a hit as higher yields weakened the relative attraction of equities, having a negative impact on fair value and increasing the cost of financing.
European shares were down for a fifth day in a row. The pan-European FTSEurofirst 300 index was off nearly 0.8 percent. It has lost about 4 percent this week, the largest weekly fall since a short-lived correction in early March.
Dealogic, a firm tracking corporate activity, recently said M&A activity since January was 60 percent higher than in 2006. Official interest rates rose from an average of 2.85 percent across the G7 countries at the end of 2005 to 3.65 percent by the end of 2006 and have edged up to 3.9 percent this year. The G7 comprises the United States, Japan, Germany, Britain, France, Italy and Canada, and with Russia forms the G8 forum.
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