European M&A to boom as crunch bites

By William Kemble-Diaz

LONDON (Reuters) - Mergers and acquisitions to forestall potential financial problems are set to boom in Europe as companies struggle in the wake of the credit crisis, a leading restructuring expert said on Thursday.

Ben Babcock, Morgan Stanley's head of restructuring in Europe, told the Reuters Restructuring Summit that more European companies were likely to come together as access to funding became more difficult and balance sheet pressures grew.

"I think you are going to see a lot more M&A (mergers and acquisitions) in this market," Babcock said. "It is going to be a more prominent solution."

Babcock said the process of consolidation already evident among financial institutions, which had so far seen the most stress, was set to spread elsewhere as the real economy buckled under the impact of the credit crunch.

Britain's biggest mortgage lender HBOS HBOS.L has had a takeover offer from Lloyds TSB (LLOY.L) in a deal that would likely have fallen foul of competition rules in a better economic climate.

In the United States, investment bank Merrill Lynch MER.N is on course to follow Bear Stearns by getting swallowed by a rival, while Britain's Barclays (BARC.L) and Japan's Nomura (8604.T) have been picking over the remains of the now bankrupt Lehman Brothers LEH.N.

Babcock singled out private equity-owned companies, many of which were laden with debt after being acquired in leveraged buy-outs, as being possible restructuring -- and therefore M&A -- candidates.

He also said the potential for corporate stress was likely to be more broadly based than in the previous dot-com downturn, affecting a range of sectors including consumer goods and services, industrial goods and manufacturing, building products, and real estate.

"We are heading toward a very active restructuring market in Europe," Babcock said.

As bank liquidity dried up and investors sought to withdraw capital rather than provide more, so the potential would grow for M&A as an alternative solution to firms with cashflow problems or in need of a root and branch reorganization of their balance sheets.

"There aren't as many investors in these situations," Babcock said. "That's why we are going to see a significant increase in M&A activity around these situations."

The M&A route also had the potential to serve up a solution more quickly given the increased complexity of corporate capital structures, which could make the task of simply identifying creditors a challenging chore.

Babcock, who joined Morgan Stanley from Merrill Lynch MER.N this month, said the key was to anticipate potential problems before they got out of hand.

"We tend to focus on stressed companies so that they don't become distressed," he said.

(Editing by Sue Thomas)