Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.

Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).

Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.

This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.

We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina

Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.

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