Question

Hello, could you please provide a detailed answer to below question? Question: Given all time low interest rates, companies should borrow long term and use the borrowed money to takeover other firms. Discuss with suitable reasons, citing empirical evidence, whether you agree or disagree with this statement.                

Answer 1

When there would be a recessionary phase in the economy, then Central banks generally tends to lower their interest rate and various companies will be having access to a lower rate of interest and if these companies are feeling that they have survival capacity in the longer period of time then they will be utilising this opportunity at borrowing at a lower cost and maximizing their benefits by utilising the capital for a longer period of time at a lower rate of interest, because they know that they have adequate amount of Survival capacity because they have strong balance sheet and they can easily survive in the long run even if there is an economic adversity, so they will be trying to borrow at a lower interest rate in order to acquire another company and increase the market share in a recessionary period because these downturns are offering opportunities to the bigger companies who can survive and sustain in the turbulent economic chaos.

I AGREE with this statement because when there would be a lower interest rate regime and there is an economic crisis going on than large companies who are having a strong balance sheet are likely to survive and sustain in the economic Chaos and they will be acquiring the smaller companies who are prone to bankruptcies by providing them with the lower money because of their stressed financial condition and they are doing this deals at highly favorable price and these will be helping in maximizing their market share when the economy will be stabilizing so large companies are always trying to to capitalise upon the financial downturn by the acquisition of the smaller company.

If I have to present an example, I can provide it through recent acquisition of future retail by Reliance industries which is representing that the future retail does not have enough money to repay debt, and Reliance was bailing it out by investing into its equity capital and acquiring the company so it was utilising the leverage in order to acquire another company who which was a small company and distress company and the deal was done at favourable price.