Little Sign of Recovery For M&A

The pipeline of new mergers and acquisitions - the wellspring that sustains investment bankers' jobs and fattens their paychecks - is all but dry and isn't being replenished.

The $4 billion rescue of Countrywide Financial by Bank of America provided a stir of excitement for a merger market that's been all but moribund. That single combination more than doubled the total value of all M&A deals announced during this year's first week.

A pullback in new deal business doesn't bode well for investment bank hiring or compensation, and observers aren't expecting a pickup soon. While optimists point to strategic acquisitions by corporations and heightened interest from overseas buyers spurred by a cheaper U.S. dollar, it's far from clear those sources are sufficient to make up for the disappearance of large leveraged buyouts. Demand for underwriting new stock and bond issues is widely predicted to decline this year, as well.

Just 99 deals, totaling less than $2 billion, were announced in the first week of 2008, according to Thomson Financial data cited by the New York Times' DealBook blog. That marked the slowest pace of first-week deal activity for any new year since the 1990s. Weekly deal volume fell a stunning 85 percent compared with the same period a year ago, when 253 deals totaling $13.152 billion were announced from Jan. 1 - 7, 2007.

The slow start follows a precipitous slump in the final months of 2007, led by the collapse of large LBO business. After shrinking from $216.6 billion in last year's second quarter to $79.4 billion in the third, LBO announcements suffered a further 72 percent collapse in the fourth quarter, to just $22.1 billion. Not a single LBO exceeding $10 billion has been announced since July.

Smaller LBOs didn't fall nearly as much. In the $100 million - $1 billion range, there were 68 announcements totaling $27.1 billion in last year's second half, compared with 98 announcements totaling $38.3 billion in the first half.

"There's no sign of the banks getting a renewed appetite for those deals,'' Tom Lamb, co-head of private equity at Barclays, told Bloomberg. Blackstone Group believes it will be "at least a couple of quarters" before credit markets resume lending for big private-equity takeouts, Blackstone President Hamilton James said on a Jan. 10 conference call.

The upshot: bankers who cater to corporate buyers or mid-size deal sponsors may find their services still in demand. But those whose contacts and value propositions center around the PE behemoths that dominated the M&A landscape through much of 2007, may find themselves increasingly twiddling their thumbs.