How much does cheap money affect mega-business deals?
Computer company Dell is buying data storage company EMC for $67 billion in a record technology takeover.
Dell’s a pretty big company, but it doesn’t exactly have that kind of money just sitting around, so it has to take out some pretty massive loans. And it’s been a good time for companies to do that recently, with low interest rates.
It’s likely, however, that the Federal Reserve is going to raise interest rates. And when we’re talking about multibillion dollar deals, slight changes in interest rates can add up to a lot of money.
But short-term interest rates controlled by the Fed aren’t generally a big driver of whether deals get done.
“Interest rates play a very small, a barely perceptible role in affecting mergers and acquisitions,” said Anant Sundaram, professor at Dartmouth’s Tuck School of Business.
Low rates are good for businesses, of course. But Dell’s buying EMC now because it believes the companies will be worth more together. Period.
“A good deal is a good deal,” said Donna Hitscherich, a Columbia Business School professor and former investment banker. “If you think it’s a good deal, you should buy it. Cheap money just gives you a bigger margin for error.”
There will be big deals before and after the Fed does its thing. It’s no secret that smart companies don’t let short-term moves pressure them into long-term choices.
It’s not unlike buying a house. Real estate experts say people should decide based on what’s right for their families and budgets, not just whether mortgage rates are tempting. It’s hazardous to be swayed by what a bunch of central bankers might or might not do.
“The danger is getting into something that you’re not ready for or is not exactly what you’re looking for,” Trulia chief economist Selma Hepp said. “Because it’s a lifetime investment, it should not be a decision that should be rushed.”
No matter how cheap the money, whether buying a house or acquiring a company, buyers shouldn’t do it unless they are pretty sure they want it.
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