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For M&A, It’s the New Ice Age

Posted by: Ben Steverman on December 1, 2008

The mergers-and-acquisitions market has slowed down so much it’s almost in reverse.

According to Thomson Reuters, the size of M&A deals cancelled in the fourth quarter now almost matches the M&A activity actually completed. So far in the fourth quarter, $322 billion in M&A deals have been cancelled this quarter, vs. $362 billion in deals completed.

A main reason for the spike in cancellations is last week’s news that BHP Billiton withdrew its $188 billion hostile buyout offer for rival mining giant Rio Tinto.

This slowdown in M&A gives a big headache to Wall Street firms trying to make their way through the credit crunch. If the BHP deal had been completed, its financial advisors were slated to receive an estimated $140 million in fees, and Rio Tinto’s advisor would have netted $162 million. Because investment banks are only paid if a deal is completed, they now get nothing.

The main thing freezing M&A activity is the same thing responsible for today’s 680-point fall in the Dow and 9% plunge in the S&P 500 and Nasdaq: Massive uncertainty.

Corporate executives, like investors, simply don’t know how bad conditions will get, so they’re holding onto their cash. A smart acquisition at this time (just like a smart stock purchase) might scoop up a great value that could pay off long-term. But that’s a risky move when you don’t know if you might need that cash for a future need instead. Plus, even if companies were willing to go into debt to finance an acquisition, banks will resist lending money. That’s why U.S. private equity M&A is off 82% from a year ago, according to Thomson Reuters. Private equity investors can’t get financing.

M&A troubles are just one more reminder why Wall Street firms, which looked so wealthy and confident a year and a half ago, look so pitiful now. According to Thomson Reuters: Worldwide year-to-date, securitizations are off 80%, the investment grade corporate debt business is down 23% and high-yield corporate debt issuance has plunged 76%.

Everywhere you look, the business model of the investment bank remains under attack.

Reader Comments


December 2, 2008 1:28 PM

I'll buy wallstreet for a $1. Do here $1.50?

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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