M&A on pace for record despite signs of strain

By Mathieu Robbins

LONDON (Reuters) - Global M&A activity is on target for a record year after a first-half surge, bankers say, despite growing signs the benign lending environment that has underpinned the current boom may be coming to an end.

An increase in cross-border corporate mergers helped Europe push past the United States in volume for the first time in four years, and lifted the global tally of announced M&A in the first half by 51 percent to $2.8 trillion, according to preliminary data released on Friday by research firm Dealogic.

Global M&A was $1.9 trillion in the first half of 2006.

"It's undoubtedly going to be the biggest M&A market ever (this year)," said Dag Skattum, JPMorgan Chase & Co.'s global co-head of M&A.

But any full-year record could wind up heavily reliant on the strong first half.

In the last month, takeover-related debt has become harder to sell, fears of higher interest rates have grown, fallout from the U.S. sub-prime mortgage woes has spread, private equity firms have come under heavier fire and some leading buyout executives say leveraged deals have peaked.

Most bankers are unfazed, however.

"At least for the second half of this year, mergers and acquisitions will continue, and possibly in 2008, as well," said Jean-Francois Mazaud, global head of debt capital markets at Societe Generale.

"We don't have any signals that we're very close to the end of the cycle."

Buyout firms, which have contributed to the frenzy of takeovers in recent years by making bigger and bigger deals with the help of cheap cash and eager lenders, are nevertheless starting to find the going tougher.

FINANCING COSTS

Ahold's (AHLN.AS) U.S. Foodservice postponed the financing for its $7.1 billion buyout by Clayton, Dubilier & Rice and Kohlberg Kravis & Roberts due to weak market conditions.

Meanwhile, veteran corporate raider Carl Icahn said the spate of leveraged buyouts has peaked with deal financing getting more expensive.

"The question is: are we at an inflection point?" said Gavin Macdonald, Morgan Stanley's head of European and Asian M&A. "People may have pushed leverage levels to the limit at this point in the cycle and maybe lending banks want to pull back a bit."

"Still, there is a fantastic amount of liquidity."