To understand why there's a credit bubble, how it's inflating the price of stocks and what it will mean for you when it bursts, let's consider the acquisition of Avaya, a large telecommunications equipment maker, announced last week by two private-equity firms, Texas Pacific Group and Silver Lake Partners.
Avaya is expected to post revenue of about US$5.4 billion this year. It has virtually no debt and has US$825 million in the bank. Operating earnings -- profit before counting things like interest payments, taxes, depreciation and amortization -- are expected to reach US$700 million. And if that's correct, it means the price being paid for Avaya, US$8.2 billion, is 12 times operating profit, making it one of this season's richest deals.
