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Credit Freeze Puts Chill on Dealmaking, With Volume Down 29%

By Dana Hedgpeth
Washington Post Staff Writer
Friday, January 2, 2009

What a difference a year makes.

With the virtual collapse of credit markets and the drying up of money from private equity firms, 2008 turned out to be a very slow year for mergers and acquisitions.

Globally, there were 37,445 deals, totaling $3.3 trillion, down 29 percent from record volume in 2007, according to Dealogic, a data research firm in New York. In the United States the value of deals dropped 29 percent to $1.1 trillion.

"There were record highs in 2006 and 2007 in terms of the volume of deals," said Josh Lerner, a professor of investment banking at Harvard Business School. "What ended up happening with the credit crunch is that people couldn't get access to debt financing at the very generous, cheap terms they had before."

The value of mergers and acquisitions was largest in the U.S. financial sector as the credit crisis spurred linkups. The sector did $157.9 billion in deals, with Bank of America's $44.4 billion acquisition of Merrill Lynch accounting for the lion's share. The health-care and consumer products industries, which did $138.6 billion and $135.6 billion in deals, respectively, ranked next, according to Dealogic. The company's data extends to Dec. 22. Dealogic plans to release an updated year-end report early next week.

In the United States, the number of buyouts -- deals undertaken by private equity firms -- dropped roughly 32 percent to 635 deals valued at $61 billion, from 930 deals valued at $375 billion in 2007. Financial industry buyouts were the largest in value, at $15.6 billion. By comparison, the utility and energy sector, which led 2007, had deals valued at $46.43 billion.

Greg Peters, chief credit strategist at Morgan Stanley, said the declines show how challenging the environment is. "Deals are typically debt financed," he said. "With debt markets essentially frozen, the ability to do a transaction just isn't there."

One of the biggest consumer products deals in 2008 highlighted the difficulties in the market. When Mars wanted to buy William Wrigley Jr. for $23 billion, it had trouble raising financing and ended up going to billionaire investor Warren Buffett for money, analysts said.

Not every deal went through.

Globally, a record 1,309 deals, valued at $911 billion, were withdrawn. In the United States, $245.6 billion in deals fell through. Leading the way, Microsoft withdrew its bid for Yahoo, valued at $47.5 billion.

Deals fell through because in many cases in poor economic times, buyers want to renegotiate the terms and sellers are hesitant. In other cases, buyers might still be eager but can't raise the financing.

Many analysts say 2009 is unlikely to see a major resurgence in dealmaking.

"The financial sector is the one to watch," Peters said. "You're going to see continued consolidation, either government-induced or businesses that just have to consolidate. The industry is too fragmented. You have too many small institutions that are struggling. The big will get bigger."

Some analysts said they expect health-care companies, particularly pharmaceutical firms, to seek mergers with smaller drug companies that have many new drugs under development.

The M&A activity in the financial sector was extraordinary in 2008, Lerner said, adding that if the economy gets worse there could be even larger waves of mergers. If the downturn became very severe, he said, it would be nearly impossible to predict what would happen in the world of mergers and acquisitions.

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