Chip Douglas: Hi. Is there a problem with your service?
Steven Kovacs: Yeah, my cable went out.
Chip Douglas: Really? So you call me? Ha. Funny how you call when you NEED something. Is that how you treat people?
--The Cable Guy
This morning Charter Communications Inc announced that it will buy Time Warner Inc for about $55 billion in cash and stock. As ZeroHedge observes, one interesting thing about this deal is that Charter is less than half the size of Time Warner.
How can Charter afford to buy such a behemoth? Cheap money and leverage. When credit it ultra cheap, then the little guys can borrow more to buy the big guys. The problem is that higher leverage for the little guys increases risk and reduces margin for error. Small hiccups can bring the entire deal down.
This is also a nice demonstration how cheap money leads to increased industry concentration. The bigger get bigger and the small entrepreneurs get crowded out.
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