Wall Street sees 20% slump in M&As

Even Goldman Sachs Group Inc, the world's leading takeover adviser since 2001, is prepared for a decline in mergers and acquisitions income next year when a slowing economy reduces the market for leveraged buyouts.

The value of transactions may fall 20 per cent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co, Lehman Brothers Holdings and Bank of America Corp estimate.

That may reduce fees on Wall Street and contribute to Goldman's first profit drop since 2002, the last year M&A decreased, according to analysts surveyed by Bloomberg.

LBO firms, responsible for half of this year's 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years.

The pace of takeovers fell 33 per cent since the end of the second quarter as chief executive officers at companies, including Virgin Media and Cadbury Schweppes Plc, delayed asset sales amid signs economic growth in countries ranging from the US to Britain is ebbing.

"It's the end of an era for a while for the very large LBOs," said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland's biggest bank.

Lehman's backlog of investment banking fees is lower than earlier in the year, Chief Financial Officer Erin Callan told investors on December 13 after the No. 4 US securities firm said fourth-quarter earnings dropped 12 per cent.

Callan estimates M&A may fall 20 per cent next year. Her comments echoed Goldman CFO David Viniar, who said in September that the investment-banking pipeline at Wall Street's most profitable firm fell from a record in the second quarter.

Fed's Outlook
"We're in a very different environment than we were a year ago," said Stefan Selig, 44, the New York-based global head of mergers at Bank of America Corp. The value of deals may drop by 15 per cent to 20 per cent, he said.

The size of acquisitions may hinge on the US economy, which the Federal Reserve has said will grow as little as 1.8 per cent next year, which would be the slowest pace since 2002 when global mergers declined 29 per cent.

The proportion of matchmaking from the US declined to 42 per cent since July 1, the lowest since the first half of 2002, data compiled by Bloomberg show.

"There are more bankers chasing less transactions," said Jimmy Elliott, 55, global head of mergers at JPMorgan in New York, who predicts acquisitions may slump as much as 30 per cent. "There's no evidence that there will be any large public-to-private transactions in the near and intermediate future."

Botched Sale
Leveraged buyouts accounted for 24 per cent of the $2.4 trillion of purchases announced in the first half, crowned by the $32 billion offer for Dallas-based power producer TXU Corp. by a group led by New York-based Kohlberg Kravis Roberts & Co. LBO firms comprised just 10 per cent of the $1 trillion total since August 1.

UBS's Novelli expects global takeovers to drop at least 15 per cent next year.

The slowdown will be particularly severe in the US, where rising borrowing costs caused by the collapse of the subprime mortgage market hurt private-equity firms, he said.

Cerberus Capital Management LP, the New York-based private equity firm that buys troubled companies and corporate cast- offs, scrapped a $6.2 billion bid for Dallas-based Affiliated Computer Services Inc, the biggest processor of US student loans, in October, saying funding had become harder to arrange.

Georgica Plc, the UK's largest operator of pool halls and bowling alleys, ended talks with bidders December 12, blaming a "difficult banking market and deteriorating trading conditions".

"There is a pure systemic lack of trust in the financial system," said Eric Bissonnier, Geneva-based chief investment officer for Asia and Europe at EIM, which has $14 billion invested in hedge funds.