A record year for deals winds down

LONDON (CNNMoney.com) -- Mergers and acquisitions climbed to another record this year, but the credit crunch is taking the wind out of the sails of the once-mighty deal-making machine.

Worldwide merger activity surged to an all-time high of $4.4 trillion in 2007, up 21 percent from $3.6 trillion last year, according to preliminary figures released Thursday by deal tracker Thomson Financial.

Despite the standout year, the pace of deals has slowed significantly in the last six months as tighter debt markets have put a lid on corporate buyouts. The figures suggest that M&A activity, which helped drive the stock market near record highs earlier this year, may be past its peak.

Characterized by big deals, the year saw private equity firms like Blackstone Group (BX) and Kohlberg Kravis Roberts flex their might. Private equity inked a record $791 billion in deals - or nearly one-fifth of total worldwide activity - partly by taking public companies like Texas utility TXU Corp. and hotel chain Hilton Hotels private.

Corporate buyers didn't stand back. A trio of banks led by Royal Bank of Scotland took over Dutch Bank ABN Amro for $99 billion, the biggest completed deal last year. Meanwhile, mining giant BHP Billiton made an unprecedented $193 billion bid for Rio Tinto that would be the largest mining deal ever if completed.

Financial firms were the most heavily targeted globally, according to Thomson. Mergers among consumer staples and materials companies also rose. Deals in the telecoms and media and entertainment sectors, however, fell from last year.

Overall, deals began suffering in the third quarter as debt markets started to tighten - and they still haven't recovered. The biggest drop off has been in the U.S., where activity in the second half of the year has tumbled 46 percent from the same period a year ago. By comparison, global activity has fallen just 27 percent.

The credit squeeze hit private equity firms especially hard, stanching their flow of deals. According to preliminary figures, private equity deal activity fell to $199 billion in the last six months of the year, or just a third of the $592 billion reached in the first half of 2007.

While headwinds may be slowing mergers, activity isn't likely to come to a standstill. Corporate buyers are expected to keep hunting for acquisitions, and sovereign wealth, funds awash in cash, are expected to help keep deals alive.