U.S. mergers hit new record, but lag Europe

By Jessica Hall

PHILADELPHIA (Reuters) - Merger volume hit a record $1.57 trillion in the United States in 2007, according to research firm Thomson Financial, despite a sharp decline in dealmaking at mid-year when credit markets tightened and mergers became more costly to finance.

Globally, mergers totaled a record $4.38 trillion in 2007, up 21 percent from 2006, while U.S. volume rose 5.5 percent to $1.57 trillion, according to preliminary figures released by Thomson late on Wednesday. For the first time in five years, the U.S. lagged dealmaking in Europe, where mergers totaled $1.78 trillion.

The bulk of the U.S. merger volume in the first half of the year was fueled by easily obtained debt financing that helped private equity firms and other buyers borrow large amounts of money at attractive rates.

"In the U.S. we've never seen the scale of the public to private transactions led by private equity that we did this year," said Bob Filek, a partner in the transactions services group for PriceWaterhouse Coopers in Chicago.

The $44.4 billion buyout of Texas power company TXU Corp. ranked as the largest U.S. deal of the year, followed by the $27.0 billion buyout of payment processing company First Data Corp. and the $26.9 billion buyout of telecommunications company AllTel Corp. The value of the deals included debt.

"That's something that we'll always remember about this year - large scale, brand name companies, major transactions being taken private by private equity. There were more large transactions in a diverse set of industries than we've ever seen before," Filek said.

Goldman Sachs Group Inc. (GS.N), Morgan Stanley (MS.N) and Citigroup Inc. (C.N) ranked as the top merger advisers for deals in the U.S. and globally, according to Thomson Financial.

The euphoric dealmaking pace in the first half of the year drastically declined when the housing bubble burst and concerns about the subprime credit markets spooked lenders. By mid-July, money became more expensive to borrow and lenders became more strict with the conditions placed on loans.

The absence of cheap money put the brakes on spending by private equity firms, which had been the engine behind much of the merger boom. Private equity buyouts accounted for as much as 41 percent of total U.S. merger volume as of the first week of July, but that fell to 15 percent of weekly merger volume in the second half of the year, according to Thomson Financial.

In the second half of the year, total global merger activity declined 27 percent and U.S. activity fell 46 percent, Thomson Financial said.

Several large deals, such as the sale of a majority stake of automaker Chrysler LLC, saw their debt offerings postponed or priced at less favorable terms.

Other deals saw more dismal fates. The $25 billion agreement to buy student lender Sallie Mae (SLM.N) unraveled and Cerberus Capital walked away from its planned $4 billion deal to buy equipment rental company United Rentals Inc.

(URI.N).

Although many Wall Street pundits had predicted that corporations would return to the deal market once competition from buyout firms cooled, the turbulent financial markets made many potential buyers slow to move, bankers said.

"Everyone kept to the sidelines because they didn't know how bad the market would get or where the bottom was. No one wants to pull the trigger on a large deal in a nervous market," said one head of investment banking, who declined to be named.