Friday, January 05, 2007
2006 biggest acquisition year
2006 biggest acquisition year
This year marked the biggest year in history for mergers and acquisitions, striking out the previous record of the year 2000 by double digit percentage differences.
2006 was also the largest buyout year by private equity firms, meaning essentially hedge funds for the super rich.
This marks many questions for me as an investor:
Does this mean that we’re doomed for a crash in 2007 like 2001?
Has the upper class become too upper class?
Could we be headed for another 2001?
In 2000 we saw one of the largest bubbles of all time. IPOs and tech stocks and no caps to the amount they were worth, it was simply a buying spree all the way to the top. It became a time where people would sell as stocks fell and buy as they rose. Traditionally the opposite was most profitable but we were literally thrown in an upside down marketplace.
In 2000, anything with a price to earnings ratio of less than 100 was a perfect “buying opportunity.” HUGE growth was passed off for higher ratios than the market had ever seen. It was chaos, and we were coming to the worst…
During our time in the 2000 stock market rise I remember watching Bloomberg as analysts pumped each upcoming IPO as the next Microsoft. It could have been a corporation owned by the Amish but that didn’t matter, it was the next big tech stock of the 21st century!
What I am trying to show is the amount of education in the markets. No one really knew what they were buying, tickers hardly tell the name of a company, and why know? Time is money! Research takes time, and we’ve got to invest now or we will miss on the next big one!
I’m afraid we’re entering a similar stage with what could possibly become a similar outcome. Investors still do not do enough homework before investing. We still have the same schemes same shady brokers (stockbrokers) and the same people on TV touting the next big one.
Lack of education will lead to the most money lost the fastest. There is no way to protect your money if you do not make your own decisions. During the 2000 stock market bubble this became a common theme as brokers jobs were made easier because they could sell anything to anyone. (Did I mention brokers aren’t good?)
Private equity is just that, equity in the hands of private investors. Not institutions or banks or the trading houses. Private equity is like what is sitting in our etrade accounts but the difference is, the private equity you hear about so much on TV isn’t our petty five, six or even seven figure balances.
Private equity forms partnerships like the famous Blackstone. When multimillionaires and billionaires come together to form a fund or partnership their equity amounts to enough to buy up many of the highest valued corporations on the exchanges. These private equity firms buy up the company entirely and take it private. No more do these corporations exist on the exchanges, all of the stock is owned solely by the partnership. Earnings from the company can be divvied up however the group would like to.
Many times these firms are set up in places like the Brittish Virgin Isles. Places like these offer extreme tax shelters to any entity setting up shop. For the Virgin Isles, little filing is needed to start a corporation and virtually zero accounting need to be done in order to stay within compliance. As long as the corporation makes the yearly dues, the company also incurs no tax. A flat fee of less than $3000 per year is paid in order to retain financial dealings within the island.
In this way, the rich are able to remain rich by paying virtually zero in taxes on the amount of money they make from the investments of the partnership. Because these corporations are real corporations, they have all the freedoms you would normally expect. Holding property and investments is not an issue, they can even buy your home for you!
Through a variety of tactics like these the super rich are becoming super super rich. 2005-2006 were years that definitely most benefited the top few percent of the payscale rather than the bottom.
2005 was the beginning of the real estate boom that pushed any home into a multimillion dollar home. Those who do not own their own home, usually the lower class, missed out on such huge gains, further lagging society.
History would show that such a large dividing line between the rich and the poor is extremely unhealthy for any economy and society. The French Revolution being one of the best examples of such an extreme. But this is the forthcoming of the American society, as wealth floats to the top unproportionally than from the bottom it will create such a division that we have a social tragedy.
In a capitalistic society it is impossible to limit this natural phenomenon. Those who are wealthy have a head start on those who aren’t. And as we’ve seen from private equity, they also have the power to motivate business.
But is the wealth of the upper class damaging to the markets?
Not really. Wealthy investors must keep their money in the market because where else will it be kept? The money has to stay invested to keep its worth because we sure aren’t experiencing deflation.
The wealth of the rich can only become detrimental if we experience a mass exodus of the markets. As we know, rapid release of money from the markets causes extreme losses, especially when you have billions of dollars moving out from just a few stocks.
Another 2001 is very likely, but it wouldn’t be due to a fallout of the markets, rather a failure of the US Government and at the individual level.
The US economy is stuck on debt, in no other way is the US growing its GDP. The current savings rate for US civilians is a negative 2.2%. That 2.2% is PURE debt.