LBO Fever Stays Hot

Look for the sizzling market for leveraged buyouts to get even hotter in 2007.

Private-equity firms spent the past year playing a debt-fueled game of "Can you top this?" They pulled off one huge acquisition after another, unveiling a stunning $21 billion HCA deal in July and going on to gobble up giants like Clear Channel (CCU Quote) and Harrah's (HET Quote).

Now speculation is building that buyout firms are racing to pull the trigger on the biggest LBO ever, eclipsing the $25 billion bar set nearly two decades ago when Kohlberg Kravis Roberts bought RJR Nabisco. Predictions of a deal worth $50 billion, $75 billion, or even $100 billion have grown commonplace.

Though those figures are eye-popping, it's hard to argue with the logic. Private-equity firms took in more than $200 billion in new money from institutional investors in 2006, so buyers' wallets are fat. Meanwhile, Wall Street banks keep greasing the wheels by making it easy for private-equity firms to borrow huge sums.

Given the huge egos on Wall Street and the massive banking and management fees at stake, you know that money's going to be spent -- and not quietly.

Some warn that the LBO market could come to a screeching halt if banks start getting skittish about the debt being layered onto companies. Others wonder how all these debt-laden companies will manage to keep paying the bills and keep the lenders happy when the economy turns sour.