Trading volume is down. The IPO pipeline is drying up. That leaves a bustling mergers and acquisitions business as the best hope for securities firms to sustain profits.

Then again, maybe not. M&A, it now seems, can't be relied on either -- or at least not in a huge way.

Back in April, when the initial public offering calendar started to weaken, brokerage experts and bankers pooh-poohed the idea that big Wall Street firms would suffer from overdependence on the massive underwriting revenue of the past two years. Besides, they said, a slowdown in IPOs would mean a pickup in M&A activity, as companies that couldn't launch offerings, or companies that were otherwise under seige, sought buyers instead, generating a new basket of revenue.

While that theory makes all the sense in the world, it may not happen: The Internet and technology companies that investment bankers are trying to bring to the table are suddenly wary of their stocks getting crushed before they're able to wrap up an announced deal.

Lycos

(LCOS)

shares are a good example: They've been pummeled in the days following the announcement of its merger with

Terra

(TRRA)

. And Monday, when

Vignette

(VIGN)

acquired

OnDisplay

(ONDS)

, and

WebMethods

(WEBM)

bought

Active Software

(ASWX)

, all four got knocked around.

Unlike past M&A booms, when firms used leverage and cash, stock deals are now the most popular way of combining. Considering the current market conditions, in which many tech stocks are trading at half of last year's prices, an M&A boom driven by stock-for-stock deals looks questionable.

"I just don't trust the currency. They announce these deals and both stocks go down," says Tom Burnett of

Merger Insight

. "The stocks are so flimsy."

At the same time, buyers are getting choosier. Michael Madden, a merchant banker at

Questor Management

and a former top investment banker at

Kidder Peabody

, says that corporate chieftains may be concerned enough with overall

economic conditions to put off getting bigger through acquisitions.

So with trading volume low, IPOs scarce

and

M&A fees beginning to look a bit shaky, the outlook for the big banks and brokerages that prospered from the New Economy boom may see some bottom-line problems. On Thursday,

Goldman Sachs

(GS) - Get Report

was down 8.75% to 73,

Morgan Stanley Dean Witter

(MWD)

fell 6.2% to 64, and

Lehman Brothers

(LEH)

slid 6.6% to 72 1/2, continuing a losing streak that has dented investor confidence.

The

latest plunge was prompted by

Merrill Lynch

analyst Judah Kraushaar's note on Goldman. Thursday, he cited Goldman's own concerns with the consensus earnings estimates for the quarter. "Most of the company's revenue streams appear to have incrementally weakened each month in the quarter

March through May," Kraushaar's note says. He cited merchant banking, trading and overall "activity in securities markets" putting Street estimates at risk.

He has, however, maintained his intermediate-term neutral/long-term buy rating on Goldman.

Will there be deals? Sure, Burnett says; he sees the potential for plenty of activity. He says he's watching the insurance and banking industries for their much-anticipated consolidation after the repeal of the

Glass-Steagall Act

, which prohibited such activity. He's also hot on the paper-industry trail after the recent bidding war for

Champion

(CHA) - Get Report

.

Those deals are likely to be big, but in the areas of tech where stock prices have been torn asunder, the possibilities aren't quite so large for investment bankers. "The IPO pipelines are drying up and it's great to do 10 $80 million deals but it's not going to pay the bills," says one tech investment banker who requested anonymity.

This could quickly turn ugly. Many bankers and analysts are in the middle of contracts that include bonus guarantees that were to have been funded by a steady stream of IPO fees. Now, firms may start to feel the squeeze earlier than in the past.

According to

Securities Industry Association

statistics, total compensation at securities firms grew to $60 billion in 1999 from $30 billion in 1995.

Things aren't bad enough for layoffs or give-backs on bonuses just yet but the pickings may be slim for a few months. "These conditions could make it tough

to make up the revenue)," Madden says. "The crumbs falling off the table will be fewer."