It's a mad, mad, mad, mad LBO world

By Jessica Hall

PHILADELPHIA (Reuters) - With the value of mergers hitting new records and private equity firms holding more than $300 billion in new funds, investors are rushing in to place their bets on the next takeover target.

Each day brings a fresh batch of market rumors. Even companies that deny that they are in merger talks still see their shares rise on investors' hopes that a bid may eventually emerge, analysts and traders said.

"The market is getting more frenetic, and it feels more and more frenetic every day," said Jerry Paul, portfolio manager with QCM Absolute Return Fund. "Some people may be sorely disappointed in the end."

On Wednesday, International Coal Group Inc. (ICO.N: Quote, Profile, Research, Stock Buzz) denied market rumors that it was the target of a management-led buyout. Yet after that announcement, the mining company's stock still closed up 5 percent.

Meanwhile, retailer Home Depot Inc. (HD.N: Quote, Profile, Research, Stock Buzz) said last week it had had no discussions about a potential leveraged buyout or recapitalization. It made the unusual public statement in an effort to quell media reports that said private equity firms, including Kohlberg Kravis Roberts, were interested in buying the company.

But as of Wednesday, Home Depot shares had risen 2.4 percent since the denial as analysts mused that the retailer could be eventually acquired. KKR was not immediately available for comment.

"Despite (Home Depot) management's and the board comments that they have been in no discussions related to a buyout, the stock was our best performing retailer on the strength of the buyout stories," Credit Suisse retail analyst Gary Balter said in a research report.

But there are some formidable obstacles to a deal. Besides Home Depot's $80 billion market capitalization, which would make it the largest LBO ever, the home-improvement retailer also faces a weak housing market and slowing consumer spending, analysts said.