The M&A “Frenzy” of 2006: Top Bankers and Lawyers

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Last week the Wall Street Journal published its annual year-end review of merger activity for 2006.  In what the paper’s Dennis Berman called a vertiable “frenzy,” 2006 saw more than $3.7 trillion in deals worldwide, a 38% jump over transaction volume in 2005 and higher even than the previous record of $3.4 trillion, set in 2000.  The Journal‘s report highlighted several key trends in the merger world, in addition to providing an analysis of the investment banks and law firms who played the biggest part in setting a new record in 2006.

First, the Journal noted a widely recognized trend for merger markets in 2006: the prominence of private-equity transactions.  Private-equity firms participated in 20% of worldwide mergers, and 27% of U.S. mergers, last year. Five of the top ten U.S. mergers in 2006 were private-equity buyouts.  Perhaps most surprising is the Journal‘s conclusion that private-equity firms will become more, not less, prominent in mergers next year: Industry sources estimate that buyout shops have more than $750 billion in capital to invest. 

Second, the market seems almost universally enthusiastic about the prospects for continued merger growth next year.  In addition to abundant private-equity capital, experts cited lower interest rates and looser credit terms as the source of their optimism.  Stefan Selig at Bank of America predicted that there will be more than $4 trillion in mergers in 2007.

Third, there seems to be some consensus that this year’s merger activity is driven, unlike the peak previously reached in 2000, by credit markets rather than equity markets.  In 2001, when technology stocks declined sharply, merger markets–largely driven by stock-based deals contingent on equity market valuations–dried up.  This time, experts say, M&A growth is across industries, and the reason is that credit terms across markets, rather than equity valuations in a particular sector, are driving the activity.  (Of course, this suggests that M&A activity would be highly sensitive to increased interest rates.)

Fourth and finally, the growing importance of private-equity firms is having an effect on the pecking order among advisors to mergers, including both investment banks and law firms. Goldman Sachs has long been the leader in M&A activity; they led the pack in 2005 and again in 2006, having closed over $1 trillion in deals.  But, as the Journal noted, Citigroup pulled neck-and-neck with Goldman, finishing second just behind the annual leader; that change is striking given Citigroup’s 2005 position at fifth.  Morgan Stanley slid from its annual position at second to third overall. J.P. Morgan Chase was fourth this year (down from third last year); and Merrill Lynch finished fifth, down from fourth in 2005. 

The increased prominence of private equity was even more evident in this year’s ranking among law firms advising merger partners.  Skadden, Arps, with more than $763 billion in closed transactions, narrowly beat out second-place Sullivan & Cromwell–a particularly notable achievement given Sullivan’s longstanding role as advisor to Goldman and Sullivan’s position last year as first among American law firms.  Simpson, Thatcher finished third this year, the same spot as in 2005–an interesting result given that firm’s status as a premier advisor to private-equity firms.  Perhaps the biggest mover among law firms this year was Latham & Watkins, who moved up to fourth overall.  Wachtell, Lipton finished fifth in overall volume, a striking result given the firm’s size, as well as the fact that it did not rank among the top five advisors in terms of volume in 2005.

Given the growth in merger activity in 2006, and industry experts’ view that even more awaits us in 2007, you can be sure that investment banks and law firms will have plenty of merger work to keep them busy–and to keep the corporate-governance issues related to merger activity on the radar screen.

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