M&A Seen Falling 30 - 40 Percent in 2008

Beware: While banks continue raking in fees for completed mergers and acquisitions, an anemic dealmaking pace could spell a 30 - 40 percent plunge in business next year.

Piero Novelli, global head of M&A for Swiss-based UBS, told Financial News that 2008 deal volume is more likely to resemble 2005 than the record-breaking first half of 2007. That spells trouble for investment banking departments - especially those reliant on large, heavily leveraged deals for the bulk of their business.

While major banks have eliminated thousands of jobs in response to the downturn in credit and money markets, M&A desks have been largely spared. A precipitous drop in advisory revenue could change that. However, Novelli isn't looking for business to collapse the way it did in 2002-2003.

Because it takes several months to complete a deal after it's been announced, the drying up of large-scale leveraged buyouts since August hasn't yet filtered through to banks' top lines. This year's bonuses for M&A bankers are set to exceed the robust payouts of 2006 by at least 10 percent on average, according to two separate industry surveys released last month. Within UBS, Novelli says the deal pipeline for the first quarter of 2008 "remains materially higher than last year."

But don't expect it to last. "If the current market decline evident since August in announced volumes continues, we should expect a level of activity in the next 12 months closer to 2005 than 2007," Novelli warns. "(He) predicted a 30% fall in the European M&A feel pool next year and a 40% drop in the US, based on the fall in activity experienced in the second half of this year," according to Financial News.

The newspaper says that other unnamed senior investment bankers privately agree that 2008 deal activity will fall short of this year's pace.

Worldwide M&A advisory fees reached a record $23.7 billion thus far in 2007, according to Dealogic data cited by Financial News. The total is up 10 percent from 2006 and up 36 percent compared with 2005. UBS's $776 million in European M&A fees this year ranks second in that market, behind only Morgan Stanley.