KEY POINTS:
In a five-week period early last year, Henry Kravis put together the biggest-ever leveraged buyout with the purchase of Texas power producer TXU.
He then began the bidding for UK drugstore chain Alliance Boots, which he later won, and announced a deal to buy credit card processor First Data Corp.
Kravis's buying spree produced about US$250 million ($311.5 million) in fees for the Wall St bankers who helped make the acquisitions happen, according to data compiled by Bloomberg.
Goldman Sachs, holding the top spot in merger and acquisition fees for a fourth straight year, advised the buyer or seller on all three transactions.
Kravis, co-founder of Kohlberg Kravis Roberts, described a "golden age" for private equity when he spoke to a gathering of executives at the Waldorf-Astoria hotel in New York on April 19, 2007, two weeks after the First Data buyout was announced.
What followed looked more like the Dark Ages.
While investment banks raked in a record US$42.4 billion in M&A advisory fees for 2007 for their work on US$4.05 trillion in announced acquisitions, the first half of the year accounted for 64 per cent of the total. The overall 21 per cent gain in fees for the full year masked a 44 per cent decline in the second half compared with the first half, Bloomberg data shows.
Goldman Sachs brought in US$3.93 billion to stay on top of the M&A rankings. Morgan Stanley kept the second spot, with US$3.23 billion. Citigroup was third, with US$2.9 billion.
The buyout binge ended in August. Spooked by losses in US sub-prime mortgages, investors lost their appetite for the high-yield and high-risk debt needed to finance the transactions.
Credit markets froze. Buyout firms started looking for ways to back out of deals they had already inked, and banks baulked at some of their financing commitments.
In September, New York-based KKR and Goldman Sachs dropped their planned US$8 billion purchase of Harman International Industries, citing a drop in profit at the maker of audio equipment. By year-end, US$865 billion in deals had been cancelled, more than in any previous year.
In October alone, as credit markets seized up for a second time, 40 deals worth US$173 billion fell apart.
Leveraged buyouts bigger than US$2 billion to US$3 billion have disappeared, says Piero Novelli, head of mergers and acquisitions at UBS, which ranked fifth in merger advisory fee income.
The slowdown in private equity deals will push down the overall M&A market as much as 20 per cent this year, he estimates.
In 2007, Goldman Sachs, where Gordon Dyal is global head of M&A, advised on 8 of the 10 biggest transactions worldwide to stay ahead of its competitors. Goldman, along with Morgan Stanley, UBS and other firms, is helping ABN Amro, the biggest Dutch bank, sell itself to a group led by Edinburgh-based Royal Bank of Scotland for about ¬73.3 billion euros ($138.8 billion), in the biggest deal of 2007.
RBS, together with Spain-based Banco Santander and Fortis, based in Brussels and Utrecht, Netherlands, won a bidding war against London-based Barclays in October to take control of ABN Amro.
The rankings for 2008 could be shaped by a takeover even pricier than ABN Amro's. London-based Rio Tinto is trying to fend off a hostile bid by BHP Billiton, the world's largest mining company.
On February 6, Rio Tinto rejected an all-stock offer from Melbourne-based BHP that would have been worth about US$147.1 billion.
A deal at that price would trail only the US$186 billion sale of Time Warner to America Online in 2000 and Vodafone Group's US$185 billion takeover of Mannesmann in 1999.
Microsoft gave the M&A markets a February surprise with its US$42.3 billion unsolicited bid for internet company Yahoo.
Hostile takeovers and shareholder activism, which have grown more common in Europe this decade, are helping spur transactions, Novelli says.
ABN Amro was the prime example in 2007, having been urged to consider a sale by TCI Fund Management, a London-based hedge fund firm.
This year, the contest for Rio Tinto is signalling the trend will continue.
- BLOOMBERG
