Fund hunt for buyouts fires share prices

The market value of all firms listed on the Athens Stock Exchange now stands at about 75 percent of Greek gross domestic product (GDP). But how apt is such a comparison? Are the two indicators related? Usually they are. The simple reasoning behind the comparison is that it is not realistic for the market value of all listed firms to exceed GDP, that is, the sum of incomes and investment in an economy. Of course, there are valid objections; in the era of globalization, it will be argued, companies may be listed on the bourse while being active in different countries. Generally, however, comparing its total capitalization with GDP is a reasonable way of monitoring the stock market. And we must acknowledge that the figure of 75 percent is not excessive. But what may be a little unnerving is the speed at which stock market values have reached present levels. In the third quarter of 2004 it stood at 48.2 percent of GDP, and a year later at 64 percent. Nevertheless, no one is really arguing that the market is now overheated. The rising pace of stock market values – which is not confined to the Athens bourse – is helped by the rising number of acquisitions and should not be surprising. Huge amounts of capital are being moved around globally to be invested in buyouts. The problem is that such capital is usually borrowed and, worse, that repayments can be a future burden on the acquired firms, unless they are resold to a bigger firm at a profit. But all this process has positive implications. As The Economist put it: «The new institutional investors, who sideline the banks with the traditional clientele relationships, are tough opponents. The companies, under pressure of high dividends and interest payments, force managers to sharpen their wits. They urge them to seek efficiency… before they succumb to what one economist described as ‘the temptation to throw a firm’s good money into an investment rathole’.» Business Europe stands to benefit from such a transformation sparked by borrowing.

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