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.

Although the week's 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 $20 billion-plus 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 to $2.39 trillion in 2009.

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Those bubble-era deals have laden those private equity targets, like First Data, with debt, and made strategic acquisitions like Bank of America's $21 billion cash purchase of LaSalle Bank pricey.

Several other potential 2007 deals -- including the agreed-upon sales of SLM Corp. ( SLM), Penn National Gaming ( PENN) and PHH Corp. ( PHH) -- never happened, and the targets don't appear likely to find a new buyer any time soon.

Bank of America's Star-Crossed LaSalle Deal

By Lauren Tara LaCapra

Anyone wondering just how expensive bubble-era deals will prove to be may want to consider how long it's likely to take Bank of America ( BAC) to see a palpable return on investment from its $21 billion cash purchase of LaSalle Bank.

LaSalle was a Midwestern franchise of moderate size. It had a strong commercial presence in the Chicago area, a healthy wealth-management business, and retail dispersal across Illinois, Michigan and Indiana.

Bank of America agreed to buy the franchise from ABN Amro, at a net cost of $16 billion, in April 2007. In return, Bank of America would receive 17,000 commercial customers, 1.4 million retail customers and just over 400 branches. It would also gain $113 billion worth of assets, $63 billion worth of loans and $57 billion worth of deposits -- a tiny fraction of Bank of America's $1.6 trillion balance sheet at the time, but in a coveted geographic niche.

"We became one of the largest banks by deposits in the No. 3 market in the country -- Chicago -- and that's a market we did not have a significant retail presence in before LaSalle," says spokesman Scott Silvestri. "And we deepened our access to the wealth market in Chicago, and significantly broadened the array of product offerings to their clients."

When the deal closed on Oct. 1, 2007, Bank of America effectively paid $11,200 per LaSalle customer just days ahead of the market's peak.

Mark Williams, a Boston University professor who specializes in risk management and has worked at S&P, Deutsche Bank ( DB) and the Federal Reserve, says that assuming no customer defection and an annual fee target of $500 per customer, Bank of America shareholders may not see a return on investment until 2027 -- an assumption he considers generous.

"The $500 target on a 20-year payoff is aggressive," Williams says, citing a World Bank study that assumes average annual fees of $70 per bank customer. "In reality, the period it might take for BOA to recover its investment in LaSalle could take 30 to 40 years."

Bank of America dismisses Williams' projections, with Silvestri noting that such back-of-the-envelope calculations don't factor in cost savings, revenue synergies and new business developments in the intervening time. For instance, the merger exceeded original cost savings projections by 15%.

But Eliot Stark, a longtime commercial banker from the Chicago area, agrees with Williams' range of ROI projection.

"To earn back the present value of what they paid out, using the cash flows of LaSalle, will take a long, long time," says Stark, who is now consults on financial services and M&A at Capital Insight.

It's difficult to assess statistically how well or how poorly the LaSalle deal has fared -- both because some goals are hard to value, and also because LaSalle was quickly disappeared into Bank of America's enormous folds. According to Silvestri, Bank of America doesn't break out LaSalle's income or loan-performance statistics any longer, but still considers the deal a long-term success.

So far, from an economic point of view, the Midwest economy has been losing steam since roughly the time the merger closed.

The Chicago area has been relatively resilient during the recession, but even there the jobless rate has been stuck at 10% or higher since September. In Michigan, the situation has been far worse, with the state facing double-digit unemployment in most metropolitan areas throughout 2009, many surging above 15%. Indiana is a mixed bag, with some areas facing jobless rates above 18%, and others below 8%.

Another issue that attracted headlines was the departure of Larry Richman, who left the top position at LaSalle in the wake of the deal to become CEO of the smaller regional competitor PrivateBancorp ( PVTB). Richman took dozens of top managers with him, and at least some of their clients followed suit. PrivateBancorp's deposits climbed $1.2 billion, or 33%, during the quarter Richman defected, while loans jumped $958 million, or 23% -- both unusually high growth rates for the firm.

At the time, Bank of America CEO Ken Lewis predicted that the staffing and asset losses would be temporary, and insiders point out that PrivateBancorp hasn't been faring so well recently itself. But four sources familiar with the LaSalle deal and with the Chicago banking industry characterize the situation as a loss for Bank of America.

"They suffered a material loss of senior lenders, clients and other employees," says John Chrin, a former M&A banker at JPMorgan Chase ( JPM) who is now a fellow at Lehigh University.

"In retrospect, I would argue the deal destroyed value for Bank of America shareholders -- they bought at the top of the market, used valuable capital, increased their mortgage exposure and have experienced franchise erosion," he adds. "In, sum -- not a good deal."

Indeed, just after the deal closed, it became clear that Bank of America's Tier 1 capital ratios wouldn't remain as high as initially projected, because of unexpected losses as the financial crisis began to take shape. In the quarter it was acquired, LaSalle also brought along significant increases to Bank of America's non-performing assets and troubled commercial loans -- an area that is especially under stress today.

With a relatively small portfolio, LaSalle's impact on Bank of America's loss metrics has been marginal at most. But David Leibowitz, a Chicago attorney who is familiar with the local banking industry, says Bank of America "has not done a very good job either of digesting the La Salle commercial and real estate portfolio." Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors, who follows Midwest banking industry closely, agrees.

"Watching the projects they were involved with over the last few years, I suspect that the quality of that loan book is proving to be a liability now," says Sorrentino.

Ultimately, it seems, LaSalle was a star-crossed deal -- one with great potential, but tragic timing.

When it closed, on Oct. 1, 2007, Bank of America shares were trading at over $50, its market cap was over $226 billion, and the Dow Jones Industrial Average had just crossed the 14,000 threshold. In less than a year's time, the bank's market capitalization was sheared to nearly one-third of that value, and the Dow had dipped below 11,000.

The only bigger U.S. financial M&A transactions from 2006 to present have been KKR's $27.7 billion leveraged buyout of First Data, and Wachovia's tragic acquisition of the subprime lender Golden West, according to Dealogic. In fact, the twisted logic of this bubble-era deal suggests that Bank of America's drive for dominance in the Midwest was worth $2.5 billion more than Merrill Lynch, $4.5 billion more than Mellon Financial, $6.2 billion more than the North Fork franchise and $8.3 billion more than Wachovia in its entirety.

In Bank of America's defense, though, no one knew that the bubble was about to burst. Sorrentino also points out that Bank of America wasn't the only one trying to get established in the Midwest through major acquisitions. In 2004, JPMorgan merged with Chicago-based Banc One, then the sixth-largest U.S. banking institution. The other option -- organic growth -- has been pursued by banks like Fifth Third ( FITB), but takes an incredible amount of time, dedication and investment.

Furthermore, says Sorrentino, it "hasn't proven to be that great of a return."

Bank of America management wasn't the only group of financial players blinded by the M&A light. Analysts on a conference call related to the LaSalle acquisition asked a lot of questions about how the deal was structured, and what Bank of America expected to gain, but not a single one questioned the price.

Shareholders, on the other hand, understood the situation pretty quickly. Within a few months of the deal's close, Bank of America shares were already coming under pressure.

"In hindsight, which is always 20/20, they bought at the peak of the market," says Stark, the Capital Insight consultant. "They probably got the cleanest, best piece of ABN Amro, but they paid too much."

Beware Funds That Acquire Failed Banks

First Data Deal Produces Mountain of Debt

By Philip van Doorn

First Data Corp., the payment-processing company purchased in a leveraged buyout by Kohlberg Kravis Roberts at the peak of the credit bubble in 2007, is buckling under debt that pays investors interest four times that of U.S. Treasuries.

First Data's long-term debt totaled $22.4 billion as of Sept. 30, 10.7 times earnings before interest, taxes, depreciation and amortization, or EBITDA, compared with 1.2 times in June 2007, according to Bloomberg data. KKR loaded up First Data with debt to make the acquisition, standard practice among leveraged buyout firms.

First Data's EBITDA was just 1.2 times its interest expense in last year's third quarter, up from 13 times in 2007's second quarter. Dwindling profit reflects not only higher debt but a decline in processing revenue during the deepest economic recession in 80 years.

The Sandy Springs, Ga.-based company was acquired by a unit of KKR in October 2007. The $27.5 billion deal was partially financed by Citigroup ( C), Credit Suisse ( CS), Deutsche Bank ( DB), HSBC ( HBC), Lehman Brothers (since acquired by JPMorgan Chase ( JPM)), Goldman Sachs and Merrill Lynch (since acquired by Bank of America ( BAC)).

First Data's bonds had AA ratings before the 2007 buyout. The 10 bonds totaling $9.8 billion that were mainly issued late in the third quarter of 2007 before the buyout was completed are rated below investment grade, at "Caa1" or "Caa2" by Moody's. The bulk of those bonds mature in September 2015.

The company also has $12 billion in loans due in September 2014.

Credit default swaps that protect against default were selling for 820 basis points Tuesday, up from about 600 basis points previously. In comparison, credit default swap protection for JPMorgan goes for 100 basis points.

Most of the First Data bonds were trading between 82 and 89 cents on the dollar Tuesday. The largest issue, for $3.3 billion with a 10.55% coupon, was trading for 89 cents on the dollar, which works out to a yield of 11.5%.

There's plenty of time for the U.S. economy to turn around and First Data's operating profit to rebound before the $12 billion in loans come due in September 2014 and the bulk of the bonds mature in September 2015. The success of the KKR buyout hinged upon a growing economy and a better environment for the credit-card industry than we have now.

If First Data's processing revenue fails to grow significantly, it's possible that bondholders -- who are enjoying fat interest payments -- may eventually be forced to take it on the chin and swap their bonds at a significant discount for new paper.

Buyout Busts Reborn?

By Dan Freed

With M&A starting to pick up a bit, we thought it might make sense to take a look at some of the planned buyouts from the deal boom that fell apart when the housing crisis hit in 2007-2008 and try to determine whether any of the rumored targets could end up back on the block.

There's already been an example, as Xerox's ( XRX) recently completed acquisition of Affiliated Computer Services -- a company originally targeted by Cerberus Capital Managementbefore the hellhounds suddenly lost their appetite in October 2007 -- suggests the past may in some cases be prologue.

Once a company has been put in play, the likelihood it comes up again as a potential target would seem to be significantly increased. Assuming the key executives and board members are still in place, everyone now knows they are open to a deal. And if willing buyers were out there when the company was in many cases twice as expensive, why not now?

The problem, in most instances, is the lack of lenders ready to stand behind the buyers. Still, financing is available, and independent companies, known in dealmaker circles as "strategics," need less of it than the private equity firms that dominated the last deal boom.

Indeed, it is difficult to raise enough debt to finance a big leveraged buyout these days, though not impossible. In a recent interview with Bloomberg television, The Carlyle Group boss David Rubenstein said $10-20 billion deals are pretty much off the table. While he sees room for a $4-6 billion buyout, he says such a deal typically requires 50% or more of the money to come in the form of equity, vs. about 35% three years ago.

Some expect that could change as soon as a year from now, meaning strategic buyers may be in a hurry to get deals done before the financing window opens again for the big buyout firms like Carlyle, Kohlberg Kravis Robertsand The Blackstone Group ( BX).

The slideshow that follows looks at some prominent acquisition targets that were on the table before the markets seized up, and their prospects for being sold today.

SLM Corp. ( SLM):

The parent of student lender Sallie Mae was supposed to be bought for $25 billion by JC Flowers & Co., JPMorgan Chase ( JPM) and Bank of America ( BAC). But the buyers began backpedaling in July 2007, arguing that new laws cutting subsidies to private student lenders meant they were no obligated to go forward. The deal was officially over by January of the following year.

Sameer Gokhale, analyst at Keefe, Bruyette & Woods, says Sallie Mae's student lending relationships and capabilities would be attractive to many potential buyers. However, he thinks a potential buyout is quite a ways off. Large banks are still more interested in cleaning up their balance sheets than making new loans, and buyout firms can't raise enough debt to get such a large deal done right now.

Another obstacle to a deal, Gokhale says, is the threat that the government could take away the federal backing Sallie Mae enjoys for loans made under the Federal Family Education Loan Program (FFELP), which has been highly profitable for the lender. Gokhale thinks Sallie Mae is worth $14 per share -- more than 20% above where it was trading mid-Thursday -- even without FFELP, but says valuing the company is a difficult task as long as FFELP's status is up in the air.

Penn National Gaming ( PENN):

Penn National, an operator of various types of racetracks, was supposed to be sold for $6.1 billion, or $67 per share, to Fortress Investment Group ( FIG) and Centerbridge Partners. Even before that deal was finally called off, in July 2008, the shares were selling for less than half that price as the market clearly saw what was coming.

Gambling companies rallied strongly after the tech bubble burst, but things are different this time around. The geniuses who were borrowing against their houses and blowing those monies betting on the greyhounds at company properties like the Sanford-Orlando Kennel Club in Longwood, Fla. don't get to do that anymore, as there's a good chance most of them have lost their houses by now.

Making things worse for companies like Penn National, the small number of people with money left to gamble have more racetracks and casinos to choose from than ever before.

Jefferies & Co. analyst John Maxwell says gambling companies don't want to sell themselves on the cheap, so he expects few if any acquisitions in the sector for the foreseeable future.

Huntsman Corp. ( HUN):

Huntsman was one of the few jilted buyout targets that got some measure of recompense after being left at the altar. The chemical manufacturer won a $1.7 billion settlement from Deutsche Bank ( DB) and Credit Suisse ( CS) after the banks refused to fund a $28 per share acquisition by Apollo Management and Hexion Specialty Chemicals. But with Huntsman shares at around $13, investors in the chemical manufacturer can hardly be thrilled about their lot.

Jefferies & Co. analyst Laurence Alexander says consolidation in the chemical sector will continue and Huntsman will remain attractive to larger players. That said, he argues hostile deals are a rarity in the sector, and friendly ones take a long time to get done because they are so dilutive for the acquirer.

PHH Corp. ( PHH):

This odd coupling of businesses -- one that takes care of fleets of company cars in industries such as pharmaceuticals that don't care about cars and the other a mortgage servicer -- was set to be split up and sold for $31.50 per share to The Blackstone Group ( BX) and General Electric ( GE) until the deal came apart in January 2008.

Sam Johnson, portfolio manager at Merion Investment Management, thinks General Electric, the industry leader in fleet management, would be happy to take another crack at buying that business from PHH, the number two player.

Paul Miller, analyst at FBR Capital markets, thinks a spinoff or sale of PHH's fleet management business is likely once it is operating at full tilt. At the moment, however, PHH management has indicated the unit's access to funding is still somewhat limited.

BCE Inc. ( BCE):

At C$34 billion, the planned buyout of Canada's largest telecom by the Ontario Teachers' Pension Plan and a pair of buyout firms was one of the largest failed deals of 2008. Massive cost cuts (the company laid off 10,000 vice presidents) and stock buybacks have the company back on track, with EBITDA expected to rise in 2010 (see above chart) and the stock trading near a 52-week high, though the shares are still well below the C$42.75 per price that had been agreed upon.

CIBC analyst Robert Bek believes selling itself is nowhere on the agenda of BCE's board at the moment. It is more likely to be an acquirer as it looks to reduce its reliance on wireline customers, who still account for two-thirds of its business. Bek believes a long-rumored megadeal with TELUS ( TU), which dominates the western Canadian market, is likely.

Deal combinations of all kinds now look more plausible as Canada's parliament indicated this week it will look at relaxing foreign ownership restrictions. Bek says Canada is way behind most other countries on this issue, and he expects little opposition. Still, it could take five years before the rules are completely unwound. In the meantime, though, he is looking for consolidation among Canada's telecom companies as they look to position themselves ahead of the expected influx of foreign investment.

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