M&A Outlook Muted as PE Firms Eye Debt

M&A activity looks to remain quiet as the large private equity firms that drove the deal boom leading up to the economic crisis focus on buying beaten down debt.
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M&A activity looks to remain quiet as the large private equity firms that drove the deal boom leading up to the economic crisis say they are focused on buying beaten-down debt.

The Blackstone Group

(BX) - Get Report

President and COO Tony James, on the company's earnings call with analysts Wednesday, spent much more time talking about opportunities in buying distressed debt and providing rescue financing than he did talking about potential acquisitions.

TPG

, another private equity giant, made similar comments in an investor letter cited by

Financial Times

in a report published Monday.

Private equity-led acquisitions are down considerably from a year ago, according to numbers from data provider Dealogic. That is because banks like

Goldman Sachs

(GS) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

Morgan Stanley

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are less willing to provide financing than they were at in the early months of 2008.

There were 832 buyouts around the globe worth $79.9 billion in the first four months of 2008, according to Dealogic. That compares to just 310 buyouts worth $17.3 billion so far this year, a drop of 78% in dollar terms and 63% in number of deals.

By contrast, so-called "strategic" deal activity, where the buyer is a large corporation, has fallen by a smaller margin. The $643 billion worth of strategic deals represents a 32% drop from the total seen through the first four months of 2008.

Indeed, the private equity pullback is creating opportunities for corporations, says Damien Zoubek, partner at Cravath, Swaine & Moore.

"If you have buyers that were priced out of the frothy times and weren't willing to pay the premiums that were being paid, now they feel like valuations are much more attractive," Zoubek says. "If they have the ability to do deals without borrowing money, those are the things we'll continue to see drive the market."

Things got especially exciting on April 20, when $27 billion worth of deals were announced on a single day, according to

Financial Times

.

Still, overall M&A activity is well below where it was during the boom years, Dealogic data show, even though its numbers are inflated by government-led equity infusions. The top five deals of the year listed by Dealogicinclude two such transactions: a $25 billion investment in

Citigroup

(C) - Get Report

and a $22.12 billion bailout of

Lloyd's Banking Group

(LYG) - Get Report

.