Fewer bankers chasing M&A. (Business Briefs).

As the merger business has wound down with the struggling economy and three years of declines in the stock market, major companies can probably expect a lot fewer calls from investment bankers. One big reason: Those bankers may not be there any more.

Wall Street ratchets up and down with the economy and major deal flow, and in recent months, things have been at very low ebb. At Merrill Lynch & Co., for instance, the ranks of senior relationship bankers has been slashed dramatically, and lesser cuts have rippled through other big firms at regular intervals. Some of those senior people have ended up at smaller firms and are still eager to put deals together. Those don't have to be mergers; many will be sales, as multinationals continue to "rationalize" their businesses.

Indeed, divestiture is reasonably hot. "Large public companies are very focused on building their core businesses and divesting whatever is non-core," says Dale Dawson, head of investment banking/corporate finance at Stephens Inc. in Little Rock, Ark. While the market often realizes that the seller is strapped for cash or has other compelling reasons to spin off a unit, sellers don't always have much choice. Last year, for instance, Tyco International sold the CIT Group for considerably less than it had bought it for the previous year, in order to meet liquidity needs.

Large or small, these deals are bringing idled investment bankers running. "We're seeing bulge-bracket bankers who would compete for a $50 [million] to $100 million transaction; they had never done that before," Dawson says. "They show up when they sense an opportunity to get engaged -- it's become something of a cattle call for transactions." Coby Sonenshine, CEO of RMS EquiCo Capital Markets, an investment banking firm to the middle market, adds: "It depends on the size of the transaction. If you've got a $100 million deal, you would expect to see competition in terms of other bankers. Smaller than that, it's really quite rare."

Dawson and others see more opportunity among middle-market companies than large corporations, especially established ones that are looking for mergers to grow. "The middle market tends to be more opportunistic -- their thinking revolves around strategic M&A," Dawson says. "They will merge or liquidate a business if the circumstances suggest it. Sellers are more realistic now about their expectations, so that will make it easier to get deals done."

Sonenshine agrees that the forces driving middle-market sellers -- "98 percent" of his company's clientele -- aren't the same as those spurring public company CEOs weighing a sale. "Economics may not be foremost on their minds -- it could be health or timing, if they're planning to retire and their children don't want to run the business," he says. Or they may simply be interested in offering a piece of the company in exchange for fresh capital.

Recapitalizations often involve private equity groups, and there is considerable attention in that area these days, says Stephen S. Gray, managing director of TRG, a troubled-company consultant headquartered in Boston. However, he adds, "The leverage isn't there to do good management, good earnings' deals. [Private investors are] looking at bargain deals, and some are doing them quite effectively. But there is always a battle between the old money and the new money. A lot [of recapitalizations] are being done in bankruptcy."

Gray adds that while an increasing number of public companies are contemplating returning to private hands (see story, page 24), that's not always a straightforward matter. "The biggest issue is valuation -- how the public shareholders get treated. They don't have a seat at table," he says. "Legally, they are represented by the board, but creditor constituencies are much more aggressive."

Dawson and Gray don't believe that this year will be especially rosy for earnings, or investor optimism. "No one thinks there will be big turnaround in '03," says Dawson. Echoes Gray: "There's no rising tide at this point."

Mergers & Acquisitions Slump

U.S.             2002   2001  % Change

Number          7,387  8,545     -13.6
Value ($ bil.)  441.3    683     -35.2

Europe

Number          7,704  8,871     -13.2
Value ($ bil.)  417.7  676.4     -38.2

Source: Mergerstat