M&A rebound may take years to regain 2007 level

Written by Bloomberg | Updated: Jan 1 2010, 04:09am hrs
Takeover advisers who cheered a surprise fourth-quarter surge in mergers and acquisitions may still have years to wait for a return to 2007s record dealmaking.

Takeovers by Exxon Mobil Corp and Warren Buffetts Berkshire Hathaway Inc helped push up the value of M&A transactions 52% to $530 billion in the quarter, the fastest pace in more than a year, according to data compiled by Bloomberg. Even with the increase, analysts at firms including Morgan Stanley and Sanford C Bernstein & Co are predicting 2010 wont be especially busy for merger specialists.

If you look at previous M&A cycles, the first year after the trough is always one of gentle recovery before things pick up, said Dieter Turowski, Morgan Stanleys head of European M&A, who predicts deals will rise 10% to 30%. Its going to take us a couple of years to get back up to peak volumes. His New York-based firm is 2009s biggest merger adviser, according to Bloomberg data.

Mergers are recovering as the US economy picks up speed, with the Standard & Poors 500 advancing 25%in 2009. Economists surveyed by Bloomberg estimate annualised fourth- quarter growth rose to 3% from 2.2% in the preceding period. More deals mean more fees for Wall Street, which probably earned $17.5 billion for merger advice this year, the least since 2005, according to Bernsteins Bradley Hintz.

Hintz predicts M&A deals will jump 35% next year, measured in total dollars. Thats not enough to beat 2008 and Hintz said he expects M&A wont reach 2007 levels for at least four more years.

Morgan Stanley was the biggest merger adviser this year, according to data compiled by Bloomberg, the first time since 2000 it unseated Goldman Sachs Group Inc Morgan Stanley worked on at least 268 takeovers worth about $531 billion combined, compared with 254 deals by New York-based Goldman Sachs valued at $478 billion.

Skadden Arps Slate Meagher & Flom LLP was the biggest legal adviser to principals in transactions. Skadden is working on at least 141 deals worth $212 billion, Bloomberg data show.

The publicly traded firms whose results are most influenced by M&A cycles include investment banks Lazard Ltd, Evercore Partners Inc, and Greenhill & Co, because advising on takeovers is their biggest business, Goldman Sachs analysts said in an October research note. They recommended buying Lazard to bet on a rebound.

Mergers and acquisitions dropped about 37% this year to $1.75 trillion, according to data compiled by Bloomberg, less than half of 2007s record $4.04 trillion. If the fourth quarter sets the pace for next year, mergers will rise 21%.

The Conference Boards index of CEO Confidence advanced to 63 in the third quarter, the third straight quarterly increase among US business leaders after a record low of 24 a year earlier. US gross domestic product will expand 2.6% next year after dropping 2.5% in 2009, according to the median estimate of economists surveyed by Bloomberg.

Some companies may rush to do debt-financed deals to take advantage of historically low borrowing costs that might not last, said John Studzinski, head of Blackstone Group LPs advisory business. The three-month London interbank offered rate, the amount banks charge to lend to one another, declined to 0.25% as of Tuesday from 4.82% on Oct 10, 2008, when the spread between the lending benchmark and the Federal Reserves target rate reached a record in the aftermath of Lehman Brothers Holdings Inc.s collapse.