Big day for buyouts, but tepid pace to continue

Industrial giant Ingersoll-Rand's ir $10.1 billion buyout of Trane tt Monday creates one of the biggest makers of air conditioners, but it also reminds investors that the merger mania that propelled stocks earlier this year has largely vanished.

By all respects, Monday was a busy one for mergers, posting the largest dollar volume of deals on a single Monday in five months, Thomson Financial says.

Still, while such harried merger activity would normally put investors in a good mood, stocks continued their slide Monday. The Dow sank 173 points, or 1.3%, to 13,167, and the Nasdaq crumbled 61 points, or 2.3%, to 2574.

Investors figure Monday's merger mini-boom was an anomaly and the slowdown in buyout activity that started after the summer will drag on, taking away a big demand for stocks. Well-known buyout attorney Martin Lipton of Wachtell Lipton Rosen & Katz predicts a 25% drop-off in buyouts in 2008 in a memo released to clients Monday. Meanwhile, other worries about the economy continue to heat up.

"The safety net for stocks (mergers) is rapidly disappearing," says Jack Ablin of Harris Private Bank.

The drying up of merger activity this year has been stunning in that the:

•Number and dollar value of U.S. deals are crashing. Just 375 deals were announced in December, Thomson says, down 63% from the May peak and 57% below last December. The $75.8 billion in deals in December so far is down 44% from last December and off 67% from the May peak, Thomson says.

Much of the slowdown is because of the credit crunch, because leveraged buyout firms are struggling to raise money to buy companies, says Ken Henderson of law firm Bryan Cave.

•Global merger activity has cooled. Despite strong growth overseas, the dollar value of global mergers is down 39% in the second half of the year from the first half, Dealogic says.

•Most industries are being affected. So far, 34 of the 49 industries tracked by FactSet Mergerstat have lower merger activity this year than in the same period last year.

Some hope M&A will outpace expectations next year, Henderson says, especially if cash-rich companies step up. Steven Bernard of investment bank Robert W. Baird says foreign companies will also look to buy U.S. companies. The number of global deals is up 9% in the second half from the first, Dealogic says.

The market needs to sort out investor concerns about the economy. If that happens, stocks can recover without mergers, says Robert Dow of Lord Abbett.

Merger announcements "pushed things to extremes (in early 2007), but that doesn't mean the market can't do well without them," he says.