After credit crisis, new forces drive deals

A tightening of credit is changing the merger landscape - from the type of deals getting done to the buyers doing them.

By Grace Wong, staff writer

LONDON ( -- Two months after the credit crisis ground merger activity to a halt, dealmaking is being rekindled.

The drive to merge is expected to gain momentum into next year, but the shift in the credit markets has altered the deal landscape.

"The playing field has changed," said Paul Schaye, founder of Chestnut Hill Partners, a boutique investment bank in New York.

Tighter credit markets have made cheap debt less readily available, and an upheaval in global financial markets put the skids on new deals in August.

Private equity has been especially hard hit. These buyers, which have been the main driver of the recent M&A boom, rely heavily on borrowed funds to do their deals.

Worldwide private equity deal volume totaled just $19.8 billion in August, and $22.2 billion in September - the lowest two month total since January and February 2005, according to Dealogic.

The private equity deals that have managed to get done have mostly been smaller in size. One of the most recent transactions - Bain Capital's move to take network equipment maker 3Com Corp. (Charts) private for $2.2 billion - is a far cry from the huge deals that characterized the boom.

The rampant pace of activity in the first half of the year has put 2007 on track for another record year for deals. In the first nine months of the year, worldwide merger activity hit $3.6 trillion, surpassing the total from all of 2006, according to Thomson Financial.

But the next wave of deals is expected to be led by corporate rather than private equity buyers. So-called strategic deals have faced stiff competition from buyout firms in recent years, but this pressure has now been alleviated.

The stock rally also helps support corporate dealmaking, since a rising share price can give a buyer more currency with which to do deals. The Dow Jones industrial average, which tracks 30 large U.S. companies, and the broader S&P 500 index both soared to all-time highs on Tuesday.

The corporate deal drive depends largely on a stable economic outlook. Although the U.S. economic picture has become less clear in the wake of the credit crunch, deals are expected to keep happening as businesses seek growth through acquisitions.

"So far we have not seen too much concern about the economy. The outlook is a little iffy, but no one is overly concerned," said Steven Bernard, director of M&A market analysis at R.W. Baird and Co. in Chicago.

Furthermore, transactions valued at less than $1 billion, which make up the bulk of strategic deals, aren't likely to be affected by turbulence in the markets as much as bigger deals will be.

"Strategic buyers may be more conservative, but they aren't going to go to the sidelines quite yet," said Andrew Sherman, a partner at Washington-based law firm Dickstein Shapiro who focuses on M&A.

Even if the U.S. economy falters, the slowdown won't derail the consolidation drive that has helped fuel rampant cross-border activity, which has accounted for about 40 percent of total volume so far this year.

The falling dollar has made acquisitions of U.S. targets by foreign buyers more attractive.

Earlier this month, Canada's TD Bank said it was buying Commerce Bancorp (Charts), a regional mid-Atlantic bank, for $8.5 billion in cash and stock.

"The dollar is so weak, you're going to see continued interest in cross-border deals," Dickstein Shapiro's Sherman said.

Overall deal activity has slowed from the frenetic pace seen in the first half of the year, and it will be difficult to exceed this year's record in 2008, market watchers say.

But the problem in the market is more psychological than anything else, according to Bernard. As worries make their way through the market, activity should pick up again.

"It will take a while for this to work through the system," he said. "But as long as the economy moves along and stays out of recession, we'll see a pick up in activity in 2008." Top of page