rcl republica, page-7

Interesting reading from the "Motley Fools", sounds like someone we know.

""Companies getting in on the act

To prove that business can be just as much a slave to fashion as its owners, we saw companies take on irresponsible levels of debt in the past decade because -- yep -- 'everyone else was doing it'.

The latest version of the story is the multitude of capital raisings.

I've lost count of the number of large and small companies who have announced plans to raise capital in the past six months, with Seven West Media (ASX: SWM) the latest large company to tap shareholders for more cash.

Even the banks are getting in on the act, with Westpac (ASX: WBC) the latest to raising more funds with a subordinated debt issue.

(We cautioned about Seven West's outlook in response to a question from a reader on our Facebook page only a few days ago. If you're not yet a fan of The Motley Fool on Facebook, why not click here and join in?)

I wouldn't be at all surprised if some companies are taking the opportunity to raise cash now simply because the market is so used to these raisings. They may well figure 'why not: now is as good a time as any'.

Hiding in plain sight

When you're the odd man out, people take notice -- when you're simply the latest in a long line, you can fly largely under the radar (or at least not draw too much scrutiny).

Don't get me wrong -- a capital raising is far more preferable than dangerous amounts of debt. Investors should be thinking critically about what these actions mean, though.

In some cases, companies are raising additional capital to fund growth. As long as the growth is profitable and sustainable, that's likely to be a good use of funds.

In others, companies are borrowing to pay down debt -- a sign that either they borrowed too much in the past, that cashflow isn't sufficient to comfortably cover repayments… or both.

For that latter group, the sound you're hearing is chickens coming home to roost!

'History doesn't repeat, but it does rhyme'

That quote was attributed to Mark Twain.

We don't do short-term predictions here at The Motley Fool (we learnt our lesson with an infamous interest rate call).

One bet I'd happily make with any takers is that once we get past this capital raising fad, and the sharemarket starts climbing, analysts and investors will forget the lessons of the past, and will start to see so-called 'lazy balance sheets' -- that is, companies with less debt that they could have (based on the profits earned in the good times, of course).

They'll convince company management to raise large amounts of debt to 'turbo-charge' returns, coercing reluctant CEOs by telling them 'everyone else is doing it'.

It'll look good for a while, as long as the economy stays strong and interest rates stay low.

At which point the economy will start to decline (the economic cycle is far from dead) and/or interest rates will jump. All of a sudden, that debt looks toxic, and companies will start going to the wall, while analysts -- yes, those same analysts who wanted the debt in the first place -- decry 'excessive leverage'.

Sound familiar? (I'll give you a hint: the next step probably rhymes with 'capital raising'.)

Company boards and management are paid far too much to simply blame their actions on following the crowd as if they were lemmings.

Something tells me many corporate performances would be far better if each company board was obliged to have at least one mother on it -- for many reasons, but not least to ask them "if everyone else was jumping off the Harbour Bridge, would you?" ""