Greenlight Capital CEO David Einhorn sent out his Q2 investor letter this week, and the big takeaway is about how low interest rates are impacting corporate acquisitions.
In a nutshell: Low interest rates are transforming acquirers into bad shoppers. In Einhorn’s view, acquirers are paying too much for the companies they’re buying because they want to take advantage of these low rates.
This has impacted Greenlight’s performance on the short side of the fund’s portfolio. Companies that Einhorn thinks are over-valued are simply being purchased for way too much, driving up their stock price and losing Greenlight money.
“Companies we are short often have serious problems of which boards and management are probably aware,” said the letter. “This makes them more eager than usual to sell at any sort of premium. The prospective buyers ought to discover these problems during due diligence, which should make them walk away. But in the current environment, debt financing is so inexpensive that buyers can pay premiums and have the deals be accretive to EPS, making them more willing to ignore any problems they discover.”
On pages 2-4 of the letter, Einhorn takes us through a sort of Acquisitions Hall of Shame — a list of the company’s short positions that have been acquired in spite of their issues.
Greenlight, for the record, is up 6.4% year to date compared to the S&P, which has returned 5.2%.
Check out the full letter below (via ValueWalk):