LONDON Shadows that started to fall over the pitch books of European dealmakers in the second quarter are darkening, threatening to rob banks of a few billion dollars in potential M&A fees.
As rumors swirled this week about a French downgrade and riots spread across British cities, bankers said European M&A would probably only equal last year's mediocre performance if turmoil continued in September.
"Assuming the current macro environment prevails and putting opportunistic trades aside, it is hard to see volume growth in the second half of this year.
Board confidence is declining and execution risks have increased." said Wilhelm Schulz, head of M&A for Europe, the Middle East and Africa at Citigroup (C.N).
Mega transactions like Deutsche Telekom's (DTEGn.DE) $39 billion exit from the United States helped to drive deals involving a European target or acquirer up by 93 percent year-on-year in the first quarter to $321 billion, according to ThomsonReuters data.
Then fears about stuttering growth and Europe's mounting debt crisis slowed the rise to only 24 percent in the second quarter, reversing hopes of a robust rebound and several years of rising M&A.
Escalating concern has already sent year-on-year third quarter business down 25 percent to $114.6 billion.
"It is too early to call the (future) impact of the latest turbulence, but if conditions of the last two weeks continue I think M&A volumes could be flat at best versus 2010," said Giuseppe Monarchi, head of M&A for EMEA at Credit Suisse (CSGN.VX).
At the start of the year, Monarchi had been expecting that M&A in the region would rise by about 20 percent year-on-year.
According to estimates from ThomsonReuters/Freeman Consulting, loss of that extra business would cost advisers about $2.3 billion in fees.
"September will be key. The M&A market always slows down in August," Monarchi added.
Sensible, strategic acquisitions focused on growth will continue, according to Barclay's (BARC.L) co-head of M&A for EMEA, Matthew Ponsonby.
"Bread and butter M&A like this has been a strong theme all year and I see it continuing," Ponsonby said.
"Of course it is not a time for huge transformational deals, but I wouldn't say a gate has come down putting M&A suddenly off the agenda."
Global brewer SABMiller (SAB.L) is expected to renew its assault on Australian bid target Foster's FGL.AX later this month with a slightly higher offer after rival bidders failed to appear.
Fosters rejected the offer, which has risen to $11.4 billion because Foster's share price has fallen over the last few days.
Others said recent failures like the withdrawal of Cooper Industries' CBE.N $875 million offer for British rival Laird (LRD.L) collapsed on tactical grounds, not because of market volatility.
"Lot's of people seem to be of a similar mindset to me. The situation we have seen with Laird -- that is a company overplaying its hand," a London-based asset manager said previously.
Private equity firms face tougher conditions than in the first half as well, when debt was available in decent quantities and at attractive prices.
Now buyout shops and their advisers see activity drying up as appetite from lending banks diminishes once more.
"The industry as a whole is going to have a soft second half," said one senior private equity executive who declined to be named.
Leveraged loans, the traditional fuel for the buyouts business, have become more expensive in recent weeks. Lenders are pulling back on fears that they will not be able to parcel up the debt and sell it on to others during syndication.
Current processes and ones due to launch that could be impacted include the sale of PPR's (PRTP.PA) mail order fashion business Redcats for up to two billion euros and the disposal of France Telecom's FTE.PA Orange Switzerland unit, which analysts have valued at about 1.5 billion euros.
"If we have this kind of volatility, nobody wants to buy or sell," said a banker advising private equity firms.
"I'm afraid it's going to remain that way -- financing markets aren't great so it's going to be a tough end to the year," he added.
(Reporting by Victoria Howley; Editing by Hans-Juergen Peters)