M&A or A&E? Crisis to dominate dealmaking in 2009

By Quentin Webb - Analysis

LONDON (Reuters) - M&A banking next year will be more Accident and Emergency than Mergers and Acquisitions as companies slim down, banks pair up and the strong eat the weak.

Tough debt markets and homegrown business problems will make many potential acquirers hesitate, and bankers expect a drop in total M&A value, along with a rise in all-share deals.

In the year to date, global M&A is down 27 percent to $2.86 trillion from a record in 2007. Barclays Capital estimates next year will bring just $2 trillion to $2.5 trillion of deals. That would be the weakest year since 2004.

"We'll see bargain-hunting by well-capitalized buyers, non-core disposals by restructuring companies, and all-stock defensive deals, in some instances government-induced," said Hernan Cristerna, co-head of European M&A at JPMorgan.

Global stock markets have fallen steeply this year -- the MSCI World Index of 23 developed-world markets has lost 43 percent.

Bankers and executives say that situation presents opportunities for cash-rich suitors including oil majors, such as Exxon Mobil Corp, Royal Dutch Shell Plc, BP Plc and Total SA . Consumer-goods giants such as Procter and Gamble Co, Nestle SA , and Diageo Plc have a similar opportunity set.

"M&A should be countercyclical. In a perfect world, when prices are low, people should be doing more M&A, not less," said Brett Olsher, co-head of global M&A at Deutsche Bank.

"All those targets that made a lot of sense for our industrial clients but were just too expensive are in the zipcode now."

"DISTRESS-DRIVEN"

Many deals will be done to stave off collapse.

A majority of respondents in a UBS-Boston Consulting Group survey of 164 European companies predicted more M&A driven by "forced" restructuring, and all the banks and insurers who responded foresaw more restructuring next year.

As the credit crisis intensified this year, financial M&A made up almost a quarter of all deals, and sector consolidation is likely to continue in 2009 as smaller European and U.S. banks tie up with domestic peers, and insurers start to merge.

"Due to the continuing slowdown in the world's economy and the ongoing shortage of financing, we are likely to continue to see some 'distress-driven' mergers and acquisitions, as we have done in 2008," said Ian Hart, Citigroup's co-head of M&A for Europe, the middle East and Africa.

Companies will also seek to raise funds for debt payments by disposing of peripheral businesses.

Miner Rio Tinto, for example, this week said it would expand a multibillion dollar asset-sale program, as it plans to cut debt by $10 billion next year.