M&A Perks Up but Faces Long Road Back

NEW YORK (TheStreet) -- Wall Street may have kicked things off this week with a good, old-fashioned Merger Monday, but it's still way too soon to say market conditions are even inching closer to a return to M&A's heyday in 2007.

While the headline deal -- Prudential plc's(PUK) $35.5 billion purchase of the Asian life insurance unit of American International Group(AIG) -- had all the hallmarks of a bubble-era transaction, including a premium valuation, a healthy debt component and a mammoth rights issue to raise the necessary funds, it was an outlier in terms of size.

Fueled by cheap debt, global M&A totaled $4.62 trillion in 2007, according to Dealogic, and the year featured seven plus-$20 billion acquisitions, including the takeover of TXU Corp. for $43.2 billion by a consortium led by private equity firms Kohlberg Kravis Roberts & Co. and Texas Pacific Group in the largest leveraged buyout on record. After the bubble burst, takeover activity fell to $3.18 trillion in 2008 before slumping down to $2.39 trillion in 2009.

By comparison, only one other takeover bid announced so far this year has crested the $20 billion mark, and it's Simon Property Group's(SPG) hostile pursuit of bankrupt General Growth Properties (GGWQ.PK), which is valued at around $30 billion but includes the assumption of $21.8 billion in existing debt obligations.

It's early but despite Monday's flurry of deals and some hopeful outlooks in the wake of Berkshire Hathaway's(BRK.A) nearly $36 billion acquisition of Burlington Northern, 2010 is tracking in line with 2009, the weakest year for M&A since 2004.

Through February, global M&A totaled roughly $404 billion, again according to Dealogic data, compared to $386 billion in the first two months of 2009. In other words, things are a little better, but not much.

The holdup to large-scale M&A is easy to explain as financing for mega-deals just isn't available. The economy is in the initial stages of its recovery and the markets remain sensitive to being roiled by potential systemic problems, such as the recent Greek debt crisis.

The other big difference between the climate today and in 2007 is private equity and mega-deals are on the outs. That too is a function of lenders staying on the sidelines, but it also reflects the difficulties that buyout firms are having with the targets they bought at the top of the market, such as Energy Future Holdings, the former TXU; Hilton Hotels, a portfolio company of The Blackstone Group(BX); and KKR's First Data, whose earnings are barely staying ahead of interest expenses these days.