Will M&A Activity Flourish or Stall In 2008?

Implications: Market volatility, lack of liquidity and banks' unwillingness to take on more risks has hampered global M&As activity in 1Q08. Global M&A deals have tumbled to a four year low from $962 billion down to $661 billion. The private equity sector which is known for "over the top" blockbuster deal making, saw a 77% slump in the global value of deals in 1Q08 from $195 billion down to $43.5 billion. In 1Q08 the Top M&A deal makers by value was Goldman Sachs, Citigroup, Lehman Brothers, Morgan Stanley, UBS, China International Capital, Credit Suisse, Merrill Lynch, JP Morgan, and HSBC Holdings, with M&A deals total value exceeding $131 billion. Because liquidity is scarce some M&A deals have stalled, fell through or are log jammed. 2007 was a record year for global M&A deals. Private equity's share of M&As grew substantially; however, 1Q08 data suggest that M&A deals in the private equity sector may have reached its peak after years of record growth.

Analysis: In 2006 & 2007, major blockbuster deals were made by private equity firms during a time when they consistently beat the market and money poured in by the billions, however, 1Q08 has bought a "chill" over global M&A deals due to the credit crunch and liquidity drying up. 2Q08 & 3Q08 could bring a much needed boost in global M&A activity. To put into perspective the sharp decline in global M&A activity in the private equity sector, we can look back at 3Q07, when during the 4th of July week private equity firms raised $64 billion in M&A deals and in 1Q08 the global value of M&A deals in the private equity sector has slumped to $43.5 billion.

1.  In the 80's the private equity boom ended when interest rates rose and the economy slumped and in 2008, the credit crunch, losses in subprime related investments and lack of liquidity may cause a retreat by private equity firms over the next few years, however, after the tide has ebbed, more business will be in private hands and with the fall in interest rates, private equity firms may see a bounce in M&A activity

2.  Private equity firms feasted on their spoils and gobbled up companies that were perceived to be undervalued on the cheap in 2006 and 2007. M&A volume rose to its highest peak in 2006 to $3.8 trillion, when cash was king and blockbuster deals were announced almost weekly

Takeaway:  Private equity still accounts for only a small portion of corporate ownership and much of the industry's activity is among small and medium-sized enterprises and there could be plenty of room for private equity firms to expand, however, the peak of the cycle may be close because inevitably private equity is a feast or famine business so when one fund raises a lot of capital they all probably can too.  Consequently, in the current environment liquidity has been difficult to raise to get deals done.