Buyout Tide Looks to Turn

Financing has become increasingly tough to access as creditors shy away from risk. Rising defaults on subprime mortgages have thrown the value of mortgage-backed securities -- which were considered good investments by many not long ago -- into freefall. That's caused lenders to reassess their willingness to make a broad spectrum of loans.

"There (haven't) been any big Merger Mondays or Takeover Tuesdays lately," said Richard Peterson, director of capital markets research for Thomson Financial. "If the current trend continues, it's probably going to be the slowest month since October 2004."

That said, the market will be focusing on signals after Labor Day to judge the future availability of financing, experts say. Corporate strategic buyers could step into the limelight as private equity deals -- which usually rely on leveraged money -- fade.

"The freeze of the credit market has most certainly made it much more expensive to go out and buy a company," said Paul Larson, equities strategist at Morningstar.

Thomson Financial's Peterson estimates August will see a total of $45 billion in company or asset buyout deals -- which includes global spending on private and public companies in the U.S. August of 2006 saw about $77 billion in deals, Peterson noted.

But that's coming off a record period of buyout activity. In the year-to-date period, deals total about $1.3 trillion, which had the year on track to top 2000's record $1.7 trillion.

"Sometimes the markets have to slow down," Peterson said. "That gives an opportunity for those with cash looking for value and opportunity to enter the scene."

During the slowdown, stocks with takeover premiums built in have lost some of that value. These include Wendy's International Inc., which gave up 7.2 percent in the past four weeks, and United States Steel Corp., down 10 percent in the same period.

"It sort of seems the magic date seems to be Labor Day," said Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. Cues for a turnaround in September could include whether previously announced, large buyout deals are able to secure funding.

Such agreements include Dutch chemicals maker Basell's $12.1 billion plan to buy U.S. competitor Lyondell Chemical Co., and TXU Corp.'s proposed $32 billion sale to private equity investors.

S&P's Stovall said he's expecting the Fed to cut interest rates three times beginning in September, which will result in a 4.5 percent federal funds rate.

If the Fed does make cuts, bankers are likely to feel more secure about the health of the economy.

"Corporate earnings are expected to accelerate later in year, balance sheets are still healthy, job creation still growing," said Thomson's Peterson. "The M&A cake should rise again."