August merger market slowest in 16 years

PHILADELPHIA Sun Aug 24, 2008 11:45am EDT

Traders work on the floor of the New York Stock Exchange August 8, 2008. REUTERS/Joshua Lott

Traders work on the floor of the New York Stock Exchange August 8, 2008.

Credit: Reuters/Joshua Lott

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PHILADELPHIA (Reuters) - The merger market is suffering the worst "dog days of summer" in 16 years.

While merger volume traditionally slows in August as Wall Street investment bankers escape to the Hamptons, this year's U.S. deal volume is on pace to be the slowest August since 1992, according to data from Thomson Reuters.

With credit markets tight since last year's subprime credit fallout, borrowing money to finance deals over $5 billion has been difficult and private equity funds have been forced to the sidelines.

Meanwhile, the 13-percent drop in the Dow Jones industrials average this year has made it risky for corporations to negotiate deals with fluctuating stock currencies.

Deal volume in the U.S. has totaled $28.5 billion so far this month. That's 53 percent below volume for all of August 2007, when the credit crisis began to clamp down on deal activity.

This month's U.S. deal volume so far is the lowest for any August since 1992, when volume was $9.4 billion, according to Thomson Reuters.

"As long as p/e (private equity) is out of the game and strategics can't get their stocks to stay steady long enough to value deals, and as long as the financial institutions are having difficulties of their own, it's hard to get money to get deals done," said one merger adviser who declined to be named.

So far this year, U.S. merger volume has totaled about $804 billion, compared with about $1.2 trillion a year ago, according to Thomson Reuters.

The few highlights in U.S. mergers so far this month included Mitsubishi UFJ Financial Group's (8306.T) sweetened $3.5 billion bid for full control of UnionBanCal Corp UB.N and Russian steel producer Novolipetsk Steel's (NLMK.MM) (NLMKq.L) $3.5 billion deal to buy U.S. steel firm John Maneely Co.

Of course, not all Augusts are this slow.

The busiest August on record in the U.S. was in 1998, when volume reached $154.9 billion. That month got a boost from BP Plc's (BP.L) $52.7 billion acquisition of Amoco and American International Group Inc's (AIG.N) $18.1 billion acquisition of SunAmerica.

CRISIS MENTALITY

As the subprime credit crisis exploded in July 2007, bankers abandoned vacations and scrambled to keep deals from falling apart. This summer lacks that crisis mentality -- but it also lacks deal activity as the stock and bond markets remain shaky, investment bankers said.

Billionaire investor Warren Buffett said on Friday the U.S. economy is still in a recession and unlikely to improve before 2009. Still, he said stocks appear better valued than a year ago.

The uncertainty around investment banks themselves has made it difficult to get financing for deals, merger advisers said.

U.S. financial institutions, such as Lehman Brothers Holdings Inc LEH.N, are still grappling with write-downs and have become more cautious about lending money for mergers.

Lehman has suffered about $7 billion in write-downs and credit losses and it has more than $60 billion of mortgage assets that investors fear will be written down.

State-run Korea Development Bank said Lehman was one of its options for acquisitions, reviving expectations that the U.S. investment bank might still bring in a large investor.

All the market uncertainty has stalled deal-making in general.

"There are a lot of talks going on but nothing is really getting done," said one investment banker who declined to be named. "Everyone wants to talk right now. But you won't see anyone doing anything for a while."

FIRE-FIGHTING

"Last year we were just hitting the edge of the credit crunch and we were still doing a lot of M&A deals and we were doing capital-raising deals. This year it's almost all capital-raising deals, and looking at failed banks and failed bank assets," said Chip MacDonald, a Jones Day partner who focuses on mergers and acquisitions

"There is not much M&A. I have been very busy this year generally capital-raising and fire-fighting," MacDonald said.

The merger activity that has taken place has been focused on sectors "that are less directly affected by credit conditions -- businesses that are more service oriented and less balance-sheet oriented," said James Murray, head of Houlihan Lokey's financial institutions group.

There's no catalyst in sight to spark a fresh wave of mergers, bankers said. While deal activity historically picks up after Labor Day, many investment bankers said they expect deal volume to remain subdued through the U.S. presidential election in November and into 2009.

While one investment banker said the slowdown has allowed him to take his first two-week vacation in recent memory, another dealmaker said the market uncertainty makes it too risky to leave his desk.

"The deal volume is lower but the volatility is higher, making it difficult to take your eye off the ball for too long," echoed one arbitrageur, who declined to be named.

(Additional reporting by Paritosh Bansal, Jui Chakravorty and Megan Davies in New York, editing by Gerald E. McCormick)

(For more M&A news and our DealZone blog, go to here)

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