Tighter Credit to Slow M&A Next Year

Merger and acquisition activity could decline in 2008 from record-high levels set in 2007 in Europe because of the liquidity squeeze that has taken hold of financial markets since August, Piero Novelli, global head of M&A at UBS, told "Squawk Box Europe" Friday.

Tighter credit controls and the near complete loss of the Leveraged Buy-Out market (LBO) are likely to restrain corporate ambition in the coming year, Novelli said.

"If the current monthly trend continues you could predict an overall slowdown of the M&A market, certainly in H1 2008, to levels closer to 2005 and 2006 rather than 2007," Novelli told "Squawk Box Europe".

The potential slowdown comes on the heels of the strongest year for M&A activity in corporate history in Europe, with deals exceeding the previous record set in 2000.

The year also witnessed the biggest banking merger in history when a Royal Bank of Scotland led-consortium brought ABN Amro for $102.6 billion.

Reluctance to Lend

One of the key reasons for Novelli's subdued expectations is the tightening of the lending criteria in the wake of the summer's credit crisis.

"The credit markets are more rigorous and less deep and liquid than they were before, so it's a bit harder to finance deals," he said.

Evidence of the banks' reluctance to lend can be seen in the ongoing saga of troubled UK bank Northern Rock. Some of the bank's initial suitors later pulled out of the running, citing the limited availability of funds.

Adding to the effect of more prudent lenders is the pullback of LBO activity. "There is one large avenue of M&A activity that has completely vanished and that is the LBO activity," Novelli said.

Even though M&A activity could slow from its current levels, the amount of deals could still remain high and on a par with 2005 and 2006, according to Novelli.

"We see actually a very strong pipeline of business for 2008."