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Beth Bar

New York Law Journal

January 11, 2008

After a record year for mergers and acquisitions, activity will dip this year due to a decline in transactions, corporate attorneys predict.

"It is hard to be an optimist," Sullivan & Cromwell Chairman H. Rodgin Cohen said. "With the markets where they are, it is going to be a tough year. The markets hate uncertainty, and we are in an uncertain time."

Attorneys hope that "strategic" deals by American companies and an increase in transactions by foreign companies and funds will continue. But they admit that these types of deals will not be enough to compensate for growing economic problems.

The outlook contrasts to 2007 when $4.5 trillion in deals worldwide were announced, according to Thomson Financial. That was a 24 percent increase over the previous record set in 2006.

Cohen said that it was too early to tell how the slowdown would affect attorneys. But he said his firm has no plans to decrease bonuses and institute layoffs.

Martin Lipton of Wachtell, Lipton, Rosen & Katz also said in a December memo to clients that he was not "optimistic" about M&A activity. He predicted a decline of 25 percent in 2008.

But he said that "with the timing of recovery of the debt markets and with predictions ... of a 50 percent chance of recession, it is not possible to predict with any degree of confidence what M&A activity will be in 2008."

Lipton wrote that the actions of foreign sovereign wealth funds owned by foreign governments could be a "major factor."

He also said that stock-driven deals rather than cash-based ones could propel the transactions market in 2008.

"The benefits of consolidation will overcome problems in the debt markets, provided that equity markets are receptive to the use of stock in lieu of cash," Lipton said.

Matthew Herman, an M&A partner at Freshfields Bruckhaus Deringer in New York, said that European entities are likely to continue to look for acquisitions in the United States because the dollar is at a historical low when compared with other currencies, and this could propel deal volume in the coming year.

"Non-U.S. buyers, in particular those with strong balance sheets without acquisition financing needs, will certainly have a price advantage due to the weak U.S. dollar," Herman said. "With that and with the cooler level of financial sponsor activity generally, European and Asian strategic buyers and sovereign wealth funds are in a good position to exploit this."

Scott Barshay, an M&A partner at Cravath, Swaine & Moore, predicted that there would be more strategic investments by companies, rather than private equity funds, in 2008. He cited his firm's representation of IBM Corp. in its purchase of Canadian software developer Cognos Inc. for $5 billion in cash as an example of such a transaction.

According to Thomson, private equity firms or financial sponsors were a "major driver" in 2007 deal making, entering into $871 billion in announced deals -- almost 20 percent of the overall annual volume.

However, the value of announced deals plummeted in the third quarter. Only one transaction of more than $5 billion has been announced since the credit crunch hit in July, while 32 such deals were announced during the first seven months of 2007, according to Thomson.

Private equity investment funds or financial sponsors accounted for only 9 percent of announced transactions during 2007's fourth quarter, Thomson reported.

As a result of the credit crunch, U.S. financial sponsorship volume decreased during the second half of 2007. The volume totaled $126.4 billion -- a 62.9 percent decline from the $340.8 billion in activity during the first six months of the year. During the fourth quarter, U.S. financial sponsors spent only $22.2 billion.

Robert E. Spatt, an M&A partner at Simpson Thacher & Bartlett, predicted there will be a "three-way dance" of buyers, sellers and lenders to find common ground to encourage future private equity deals.

He said that an important factor in enhancing the financing for private equity deals will be the banks "feeling confident that when they commit to providing loans they will have a secondary market to turn around or syndicate the loans."

Simpson Thacher profited from the 2007 private equity craze. It represented both KKR and The Blackstone Group in deals last year, and Bloomberg recently ranked the firm No. 1 for announced private global equity deals for 2007.

Despite the slowdown in private equity activity, Spatt said his firm is "doing fine" because its business is historically split between private equity and strategic clients.

Skadden, Arps, Slate, Meagher & Flom topped Thomson's list of firms hired to do deals in 2007. Rounding out the top five were Allan & Overy, Sullivan & Cromwell, Freshfields Bruckhaus Deringer and Clifford Chance.