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The Debt Defense: Is it Enough?

Tuesday, 27 Mar 2007 | 8:56 AM ET

Companies are loading up on debt, a tactic out of the playbook of private equity. But it's not just a leveraged recapitalization, as the Wall Street Journal writes today.

A couple of months back, I wrote about Home Depot . An analyst who covers Home Depot said the DIY retailer was vulnerable to a buyout. Slowing sales and low debt levels put a bullseye on the company. Loading up on debt would remove one of those factors.

Public companies have a myriad of reasons why they might want to take on debt. The party line is: they make companies more efficient, while borrowing terms are favorable, and helps increase their bottom lines.

The cynical take on this is: they don't want to be taken private. They are defending themselves with debt. Private equity likes to know it can leverage. If a company has beaten them to the punch, a potential private equity buyer looks at the target and sees fewer options.

During a time when debt ratios are ballooning, though, and private equity is willing to make steeper bets.... Will a little debt be enough? That is the question for which doomsday "top of the market" forecasters want to know the answer.

Questions? Comments? PowerandMoney@cnbc.com

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