M&A pullback.

Despite high expectations for merger and acquisition activity in 2004, the number of disclosed and unannounced deals actually fell 4 percent in the second quarter, according to Mercanti Group, a boutique merchant bank in Los Angeles.

The problem is that many companies valued at less than $1 billion are trading at multiples above 12 times Ebitda (or earnings before interest, taxes, depreciation and amortization). That level is 22 percent higher than in 2001.

"We believe the dramatic increase in pricing is having a dampening effect on transaction volume," said Jim D'Aguila, senior managing director of Mercanti. "If leverage lenders are willing to commit four times to five times cash flow and the average Ebitda multiple is over eight times cash flow, the target needs to have a tremendous amount of growth or synergies to generate an appropriate return of three times to four times equity."

Mercanti expects a more modest M&A climate in the second half of 2004.