Dow Chemical’s ugly end to 2008, with its stock decimated and its acquisition of rival Rohm & Haas in doubt, is typical of the state of M&A in the new year: conservative and to be reverenced

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By Ben Steverman

If the last few days of 2008 are a sign of things to come, the prospects for mergers and acquisitions in the new year are certainly bleak. The latest evince is the trouble facing Dow Chemical’session (DOW) proposed $15.3 billion acquisition of rival Rohm & Haas (ROH). The deal was put in doubt Dec. 29 after the Kuwait rule cancelled a joint venture with Dow that would have indirectly provided key financing for the buyout.

The Rohm & Haas deal could be saved or renegotiated, but if it’s cancelled it would hardly be a rarity in such a troubled meteorological character for mergers and acquisitions. According to preliminary data from Dealogic, 1,309 M&A deals, totaling $911 billion, were scrapped in 2008. Deal tome in the U.S. is off 29% from 2007, boundary M&A activity has all but halted again freshly.

Deal Market Falters as Capital Dries Up

U.S. have commerce bulk plunged 86% in November 2008 compared to the prior November, according to R.W. Baird. "It’s a staggering compute" that reflects the fall’session sharp tightening of credence markets and fears of a global economic slowdown, says Baird investment banker Howard Lanser. "December isn’t looking any better."

The past year "was a horror show," says William Lawlor, a partner and M&A specialist at the Dechert decree firm.

The primary problem was the drying up of credit markets. Since the fall, even well-respected companies be favored with found it unpalatable to borrow to finance acquisitions. Never mind the riskier solitary equity shops: Their access to prime dried up earlier in 2008, with Dealogic estimating financial sponsor M&A buyouts fell 71% in the past year.

A support problem is fear: Executives and boards, along by stock investors and lenders, have trouble predicting whither the economic and financial environment testament take their companies. "If you don’t require that trust as a catalyst, deals just don’t get done," Lawlor says.

"Mergers of Necessity"

Still, companies remain eagerly desirous to make acquisitions for a multiformity of reasons. Many deals under consideration are "mergers of indispensable thing," says Robert Filek, a partner in PricewaterhouseCoopers’ Transaction Services Group. Companies are "farfetched into [deals] by means of economic realities." Companies may need to take a bribe for assets to raise capital, he says. Or weaker rivals may need to be swallowed up by stronger competitors, that can then cut costs in the merged company. The troubled fiscal sector was a hotbed of these sorts of deals, with Bank of America’s (BAC) $44.3 billion buyout of Merrill Lynch (MER) one of various examples.

In 2009 companies may be able to take advantage of opportunities created by market turbulence. The dunce market is pricing companies at "great deals," Lawlor says. "There’s just too much opportunity finished there."

Marino Marin, managing director at New York-based investment bank Gruppo, Levey & Co., predicts dealmakers in 2009 could look for M&A possibilities in industries like mining, health care, media, and technology. Baird’session Lanser predicts deals in technology, health care, and education and training outfits. He says individual equity investors, through about $350 billion "in capital sitting on the sidelines," may furthermore beginning hunting for opportunities.

Sluggish Credit, Uncertain Outlook

But even those optimistic about the M&A environment be capable of conditions must change before buyers start making, the sooner than cancelling, big deals. Credit markets have recovered a little since October. But that is only after "an almost complete failure of the banking system in the United States," Lanser says. "Banks are hushed hoarding money" needed to finance deals, he says. "You’ve got a bottleneck in credit."

And then there is the general uncertainty that hangs like a dark cloud over the entire economy. Filek offers two extreme examples: In the energy industry, the big swings in fuel prices scramble all calculations of oil and gas firms’ future financial results. That makes energy executives reluctant to pursue deals. Meanwhile, consolidation in the automotive sector is being prevented by the agency of big questions about the futurity of the U.S. auto industrial art. "Automotive M&A be possible to’t earn rolling until there is some visibility into what a restructured U.S. auto industry looks like," he says.

The superlatively good hope for a revival in M&A comes from a gradual stabilization of the two the economic environment and the credit markets. "With the new year comes new sense of possible fulfilment," Lanser says. Until therefore, Marin says, bankers desire destitution to be "very creative" to get deals done.

Efforts to save the Rohm & Haas buyout may be an early 2009 test of the ability to get deals completed despite the toughest M&A conditions in a generation.