Excerpt from FactSet Flashwire News

The end of 2007 saw a record year for M&A turn into a major slowdown. The question now is how slow it will get in 2008.

With credit markets less willing to lend for leveraged buyouts and the risk of recession hanging over the U.S., financial and strategic buyers are reining in their acquisition activity.

But deal making won’t fall off a cliff. One forecast suggests that M&A activity will match levels seen three years ago. Both private equity and strategic acquisition activity will slow. But, barring a recession, 2008 could be another $1 trillion plus year in terms of deal activity. Overall, M&A deal making is expected to fall 17% according to a Bernstein Research report. That would put the overall level of M&A activity around 2005 levels.

U.S. M&A Deals

The values given for 2008 and 2009 are estimates not actual values.
Sources: FactSet Mergerstat and Bernstein Research

The decline would be the first since 2002 when M&A ended a three year fall in deal values as the tech bubble wound down and the U.S. economy went through a recession.

That year saw deal value fall 30% from 2001 before entering the most recent boom period.

Monthly M&A Activity

Source: FactSet Mergerstat

Private equity, which has already been shut down by the lack of cheap debt, will continue to be hard pressed. Bernstein expects financial deal volumes to fall 30% next year and another 22% fall in 2009.

Private Equity M&A

The values given for 2008 and 2009 are estimates not actual values.
Sources: FactSet Mergerstat and Bernstein Research

Private equity deals have been on a decade-long march upwards, culminating last year in some $435 billion worth of deals. In terms of dollar value, the top three U.S. acquirers were all private equity firms – Kohlberg Kravis Roberts & Co., Blackstone Group, and TPG Capital.

The absence of private equity buyers will be missed as they account for an ever growing share of M&A deal volumes. In dollar terms, financial deals accounted for nearly a third of U.S. M&A last year while in 2002 private equity accounted for 10% of deals.

Private equity has been hit with much higher costs for leveraged buyouts. Credit spreads for high-yield corporate debt have widened from around 50 basis points above LIBOR to 300. Many private equity deals are still waiting to receive financing. An estimated backlog of $231 billion in leveraged loans is still outstanding.

But the decline in private equity activity will be moderated as the industry still has large amounts of money it needs to put to work. Private equity had one of its strongest years ever last year in terms of fundraising with some $199 billion in new capital commitments.

Strategic acquirers will be a little bit better off with volumes expected to fall 10% next year. Strategic deals may actually see a small boost in 2009.

Strategic M&A Activity

The values given for 2008 and 2009 are estimates not actual values.
Sources: FactSet Mergerstat and Bernstein Research

Corporate acquisition activity should be buoyed the retreat of private equity buyers. That should make auctions less competitive and help moderate prices, according to Bernstein.

Indeed, the rise of financial buyers has been cited as the cause of ever-higher prices and multiples. The median multiple for U.S. deals last year was 8.5 times EV/EBITDA, versus 3.8 times in 2002.

Yet the relatively mild decline in corporate acquisition activity could be upset by the potential for a recession. Should one occur, corporate acquisition activity could fall 30% next year, according to Bernstein. That would make overall U.S. deal activity reach $885 billion.

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