With approximately US$1 trillion in global deal volume recorded during the first 19 weeks of 2008 vs. US$1.4 trillion during the same time last year, total transaction volume so far in 2008 has fallen below the record highs of 2007. However, merger and acquisition activity is expected to stabilize throughout the remainder of 2008 and the first half of 2009, according to Ernst & Young LLP's Transaction Advisory Services group.

"PE firms and corporations still remain armed with tremendous arsenals of cash to conduct transactions once the lending environment is restored," said John O'Neill, Ernst & Young's Americas Director of Private Equity. "Once the overhang from the credit crunch is gone and lenders return to the transactions table and sellers adjust to more rational price expectations, we expect to see this cash funneled directly into the deal market."

The expectation is that the deal market's rebound will be fueled by a strong cross-border deal environment, a relatively strong middle market and more competition from corporations and robust sectors with undervalued assets.

Cross-border deals benefit from weakened dollar

Despite current US market conditions, deal activity remains lively in emerging markets. So far in 2008, we have seen an increase of approximately US$13 billion over 2007 in BRIC country transaction volume. Due to the weakened dollar, inbound investment into the US is also on the rise.

"Transactions in emerging markets tend to be smaller, minority investments that are less reliant on the credit markets. This has helped sustain deal activity in these markets through the current market cycle," said Steve Krouskos, Americas Accounts and Growth Leader for Ernst & Young's Transaction Advisory Services.

Increased attention to middle market PE

The current credit cycle has not had a significant effect on middle market deals or on deals that are less than US$500 million. During the first 19 weeks of 2008, US$209 billion in middle market transactions was recorded vs. US$260 billion during the same period last year. While overall volume remains down, middle market deals remain strong despite the broader market downturn and are attracting mega PE firms.

Increased competition from corporates

Less competition from PE firms due to a tightened lending environment, as well as less frothy pricing, has benefited corporates in the current cycle, allowing them to retain a greater portion of synergies than in previous cycles. Corporations that have the access or the ability to raise capital are viewing the present market as an ideal environment to begin growing their businesses as long-term, strategic investments.

In addition, market pressures, economic conditions and shareholder activism continue to prompt corporations to take a more active look at their holdings.

"Companies are carefully evaluating business units as potential candidates for divestiture," said Krouskos. "While buyers are naturally skeptical given current market conditions, savvy sellers are investing time and effort to perform their own pre-sale due diligence in order to improve deal speed and the likelihood of success. "These sophisticated sellers are getting a step ahead of the process by doing their homework and minimizing the risk of a buyer uncovering an issue that could affect sale price."

Hot sectors and industries

The infrastructure, financial services, real estate, oil and gas, media and entertainment and technology sectors continue to lead the pack in terms of overall transaction volume. Because of their currently undervalued assets, these sectors also have the greatest potential to stimulate a market rebound.

"We're continuing to see a lot of activity, both from PE firms and corporates in certain sectors and industries," said John O'Neill, Ernst & Young's Americas Director of Private Equity. "Strong fundamentals and cheap prices are always attractive to the right buyer, regardless of overall market conditions."