I came across this article several days ago about the future of M&A activity (see Wall Street Sees 20% M&A Slump on Scarce LBO Credit). The article contends that M&A activity is likely to decline in 2008. Big shocker there! Many of us have been saying this for months, and it consistent with the views that I have expressed on this blog for about 6 months now (see here and here and here). The article claims:

LBO firms, responsible for half of this year’s 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years… “It’s the end of an era for a while for the very large LBOs,” said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland’s biggest bank… “There are more bankers chasing less transactions,” said Jimmy Elliott, 55, global head of mergers at JPMorgan in New York, who predicts acquisitions may slump as much as 30 percent. “There’s no evidence that there will be any large public-to-private transactions in the near and intermediate future.”… “The mega-LBO is dead,” said Tom Willett, 39, joint head of European takeovers at ABN Amro Holding NV in London.

But the slowdown will not just be limited to private equity deals. The credit crunch will inflict damage on strategic deals as well, as many firms will have difficulty raising capital to complete such deals. Moreover, if the stockmarket remains volatile, strategic deals that involve stock swaps will have difficulty getting completed as well. Parties to the transaction will not only have a tougher time agreeing upon an ex ante price, but it is much more challenging to peg an exchange ratio in a volatile market.

I find it somewhat interesting that executives from the major banks project only a 20% decline in overall M&A activity. The article explains:

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate.

Like Jimmy Elliott, I have trouble buying that 20% figure. For starters, M&A deals fell 33% in the 2nd half of 2007. What makes these executives believe that 2008 will be any better than 2H 2007? If anything, credit conditions have steadily deteriorated – they certainly have not gotten any better better. So for me, that 20% represents something of a best-case, a lower-bound, a drinking the kool-aid scenario. I would not be surprised to see M&A activity fall upwards of 35% in 2008 (maybe even as high as, …gasp, 40% as an upper-bound).

I don’t know where that 20% figure came from. It must have been generated out of the banks’ departments of optimism…

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