Our Take: The Future of M&A

Market turmoil is crimping leveraged buyouts, says Blackstone Group. Buyout lending will remain depressed for at least six months, says industry pioneer Thomas Lee. Yet last week saw a peak number of global deal announcements, and the second-largest takeover bid ever.

What in the world is going on? In a word, the merger and acquisitions landscape is shifting fast.

Opportunities are migrating from large deals to smaller deals, and from debt-reliant "financial sponsors" (banker-speak for private equity) to strategically motivated corporate sponsors. Individual bankers and advisory boutiques that focus on the latter client segments will prosper in the new climate, even if the PE mega-deals of yesteryear don't resume. So will a range of other professionals and firms with ties to acquisitive corporations or favored access to acquisition financing.

A vital skill for tomorrow's bankers may be expertise in sourcing, advising and arranging medium-sized transactions and working with mid-market or privately held companies.

That will be scant solace for rainmakers whose address books are dominated by PE types who require large and frequent doses of leverage to bring off deals. One can't turn on a dime from servicing these financial sponsors to cultivating relationships with corporate CEOs and CFOs. Those few who can will face plenty of competition: Many boutiques are said to be holding off hiring in anticipation of a flood of seasoned candidates hitting the market come January.

Potential winners include focused M&A firms such as Evercore Partners, Lazard and Greenhill. Business also looks to stay brisk at the M&A advisory divisions of Big Four auditing firms and strategy consulting firms which focus on smaller transactions. PE firms that occupy favored industry niches will prosper. So will an army of law firms, investor relations/proxy solicitation firms, printing and document management firms and other outsourced services that have a foothold in this segment of the M&A market.

Shift is Evident From Deal Data

The numbers tell the story: Some 500 new deals were announced worldwide during the week of Nov. 5. That's the biggest weekly tally this year, according to Dealogic figures cited by the Financial Times. Corporate-driven deal activity "has stepped up significantly" this quarter, "with no competition from private equity," Morgan Stanley global M&A chief Gavin MacDonald told the paper. Last week , the corporate M&A market took a fresh leap when BHP Billiton made an unsolicited offer of about $140 billion for Rio Tinto. That would be the second-largest merger ever, after Vodafone's $172 billion takeover of Mannesmann in 2000.

While large-scale leveraged buyouts have fallen off a cliff, mid-sized LBO volume is only modestly off its highs. October's $11.3 billion of announced U.S. LBOs valued under $1 billion was 17 percent below the July peak. Meanwhile, combined value of $1 billion-plus deals was down 97 percent, according to Thomson Financial figures cited by The Wall Street Journal. European M&A activity shows the same pattern.

That doesn't mean all is rosy for boutiques. They, too, have stepped up reliance on financial sponsors, even while seizing market share from their bulge-bracket rivals this decade. A Bank of America analyst estimated that boutique banks' share of merger revenues climbed from 6 percent in 1999 to 8.4 percent of this year's much larger fee pool. Boutiques were involved in 36 percent of this year's financial sponsor (PE) deals, compared with just 4 percent in 1996, according to the analyst, Michael Hecht.