- Genesco Inc. and United Rentals Inc. plunged in the past week after deals to acquire them faltered, heightening concern that takeovers won't help small U.S. companies overcome a slowing economy and higher borrowing costs.
Genesco, the shoe retailer seeking to be bought by Finish Line Inc., fell the most in five years today after UBS AG asked a judge to let it out of an agreement to finance the $1.5 billion acquisition. United Rentals dropped to the lowest in a year after Cerberus Capital Management LP last week backed out of a $4 billion agreement to buy the largest U.S. construction-equipment rental company.
A jump in borrowing costs sparked by subprime-mortgage defaults is making takeovers more expensive. At the same time, profit growth at the smallest companies may slow as the housing recession spreads to the broader economy, diminishing companies' ability to pay down their debt. The Russell 2000 Index, whose members have a median market value of $589.7 million, has declined 12 percent from its July record.
``With tight credit and the feeling of uneasiness in the market, you're going to see a lot of institutions not willing to loan money for a buyout,'' said Andrew Seibert, who helps manage $400 million at Nextier Wealth Management in Pittsburgh. ``If there is a slowdown in the U.S. economy, that will have a major effect on any company that's leveraged highly.''
Announced U.S. mergers and acquisitions totaled $95.7 billion last month, down 64 percent from this year's peak monthly pace of $267.3 billion in May. Some buyout firms remain unable to finance debt for leveraged buyouts at terms they need to make the acquisitions viable.
Slowing Economy
U.S. gross domestic product will probably grow at an annual rate of 1.5 percent in the fourth quarter, down from a 3.9 percent pace last quarter, according to the median forecast in Bloomberg survey of economists.
A slowdown may hurt earnings at companies in the Russell 2000, which relied on the U.S. for 84 percent of their sales last year, according to data compiled by Bloomberg. That compares with 73 percent for companies in the Standard & Poor's 500 Index.
