U.S. M&A slumps, but strategic deals help fill void

By Jessica Hall

PHILADELPHIA (Reuters) - Merger activity in the United States dropped 29 percent in the second quarter, faring better than the 40 percent global slump, as corporations filled the void left by buyout firms and targeted big consumer brands such as Anheuser-Busch Cos Inc BUD.N and Wm. Wrigley Jr Co WWY.N.

"Strategic buyers see an opportunity here due to the absence of the financial buyers. For the last 24 months, prior to the downturn, strategic buyers were getting outbid by financial buyers. That's not happening now," said Bob Filek, a partner with PricewaterhouseCoopers' transaction services.

During the first half of the year, private equity deal volume dropped 85 percent in the U.S. and 76 percent globally, according to Thomson Reuters data released on Friday.

The strength of corporate deal-making came as private equity firms were hobbled by the difficulty of borrowing money -- and the high cost -- in the tight credit markets as well as banks' uneasiness to lend in the wake of the subprime mortgage crisis.

Jimmy Elliott, global head of M&A at JP Morgan, said he expected strategic acquisitions to continue in the second half of 2008.

"Once CEOs and boards feel confident that they are at or near the bottom, and believe there is a window of opportunity, they will not stand on the sidelines anymore," Elliott said.

"So, yes, strategic acquisitions will continue to dominate the activity."

Corporations with strong balance sheets have often had cash on hand to make acquisitions, and been able to amass additional funds for large takeovers of well-known brands with proven cash flow and high credit ratings, analysts said.

"Both Mars and Wrigley and InBev and Busch -- those are premium-brand transactions and high quality transactions," Filek said.

"When you have a good corporate buyer and you have a premium transaction, debt funding is available. What is really missing in the market today is debt funding for higher leveraged private equity transaction," Filek said.

Corporate deal-making in the U.S. totaled $402 billion in the second quarter, just shy of the year-ago second-quarter tally of $404 billion. The second quarter also rebounded from the slow start seen in the first quarter, when strategic deals totaled only $136 billion, Thomson Reuters said.

SLOWEST START SINCE 2005

Even though U.S. merger activity showed a 172 percent jump in the second quarter over the first period, the first six months of 2008 overall still marked the slowest start for a deal-making year in the U.S. since 2005, Thomson Reuters said.

The weak equity markets, the sinking U.S. dollar, skittish consumer confidence, the upcoming U.S. presidential election have compounded the problems of tight credit markets, analysts said.

In the six months of 2008, U.S. deal volume dropped 42 percent to $586.8 billion, while global volume dropped 35 percent to $1.567 trillion, Thomson Reuters said.