Cross-border mergers and acquisitions were all the rage in the good old days, say, six months ago. They were no longer the exclusive domain of American or British multinationals. They were no longer just the predictable movements of capital from the United States to Europe and vice-versa. In cross-border M&A, Indian companies aggressively gobbled up European interests. Russian and Brazilian concerns spent billions of dollars for Canadian assets. Sovereign wealth funds from Singapore to Abu Dhabi wrote enormous checks for major stakes in British and American financial institutions. Private equity shops acted like masters of the universe just about anywhere in the universe.

Now? Try wholesale retreat.

This is the new reality: Earlier this month, the head of the European defense behemoth European Aeronautic Defence and Space Co. NV, or EADS, told reporters his company balked at the last minute on a major acquisition in the U.S. "We were on the way to sending a check," CEO Louis Gallois said at a news conference, adding that the board of directors killed the acquisition in December to preserve cash. He didn't identify the target or the amount.

-- See related story: A Chastened India --

Or, witness the collapse in late December of Dow Chemical Co.'s joint venture with Kuwait's Petrochemical Industries Co., which, in turn, led to the unraveling of the $18 billion acquisition of Rohm and Haas Co.

Or, check out Royal Bank of Scotland Group plc, which sold its more than $2 billion stake in Bank of China Ltd., an investment the British bank heralded as "exciting" and "an important opportunity" when made in 2005.

"It's one thing when there's reduced liquidity. It's another when the gates come crashing down," says an M&A lawyer. "People are being completely risk-averse."

So rare are major cross-border deals these days that any transaction of size is a matter of note. The biggest cross-border transaction since the mid-September meltdown occurred on Jan. 12 when German utility RWE AG agreed to acquire most of the assets of Essent NV, a Dutch power and gas utility. RWE will pay €9.3 billion ($12.5 billion) in cash and assumed debt for Essent's production facilities and trading operations. The distribution grid will be spun off and remain held by Essent's current shareholders, Dutch municipalities and provinces."All the gazelles are running to the wrong well," says Weero Koster, an Amsterdam-based partner with Norton Rose LLP, which advised RWE. "It's all down to a few strong cases out there."

In its monitoring of cross-border deals involving the U.S., financial data provider Capital IQ logged from the third quarter of 2008 to the fourth quarter an almost 90% drop in the value of U.S.-based assets acquired by non-U.S. firms. The number of deals was cut in half. In terms of transactions completed by U.S. firms of assets abroad, the declines from the third to the fourth quarters weren't nearly as dramatic. However, 40% of the fourth-quarter total of $25.9 billion came from a single deal announcement in December, the proposed €7.9 billion acquisition by the infrastructure unit of Citigroup Inc. of Spanish toll-road operator Itinere Infraestructuras SA. Whether that ever gets completed is anyone's guess.

Expect the first two quarters of 2009 to be much worse.

"PE cross-border is substantially dead in the water. With strategic cross-border transactions, there's very, very limited activity," says the M&A attorney, who asked not to be identified. "Very little cash is changing hands. There's an incredible dearth of cash."

The dramatic reversal in cross-border M&A mirrors the merger market in general. Banks everywhere are unwilling -- or unable -- to lend. Private equity is nowhere to be seen. Auctions are dead. Corporations with cash on hand and the desire to acquire are taking their time and reluctant to commit.

This caution is understandable, say deal lawyers and bankers. "There is a lot of uncertainty," one investment banker says. Buyers have no idea what valuations will end up being when the ground stops shaking, although the assumption is they'll fall further. Sellers, on the other hand, are still wedded to prices that reflect the past rather than the future. The gap between expectations and reality remains enormous.

One senior M&A banker calls cross-border "a subset of the broader M&A market." However, additional elements can make deals moving across borders even more problematic in the current environment than purely domestic transactions. These difficulties reflect the global nature of the financial meltdown and far-reaching effects of the economic downturn, the collapse of commodity prices and the unprecedented intervention by various central banks in their own economies. They take into account sovereign wealth funds, an outsized presence that has pretty much disappeared from sight after some monumental miscues. "There's very significantly reduced dealflow overall," says Gary Eaborn, a London-based partner at Slaughter and May. "Our impression is that cross-border has been hit more than domestic."

In past American recessions, for example, muscular petrodollars or plentiful and powerful Japanese yen took advantage of a weakened U.S. economy to pick up businesses on what they considered the cheap. But with economies being hammered worldwide, no one is immune. "If it's an uneven recession, you'd expect some countries would do relatively well," says Eaborn, who cites the current weakened British pound as an opportunity for acquisitions by American or European concerns. But this recession is pretty much universal and no geography is spared.

The transformation has been quick and dramatic. Buoyed by sky-high oil and commodities prices, Russian companies, for example, trolled for big-time acquisitions overseas in 2007 and the first half of 2008, often with the blessing of the Kremlin. Steel producer Evraz Group SA paid $2.3 billion for U.S. pipe manufacturer Oregon Steel Mills in early 2007 and another $2.3 billion for Canadian steel producer Ipsco Inc. a year later.

Evraz's reversal of fortunes is dramatic. Last November, the company, led by CEO Alexander Frolov, had to borrow money from the Russian government just so it could pay its taxes.

"Russia was sitting on a pile of money until a few months ago," says Eaborn. But with the collapse of petroleum prices, "the country is having its own difficulties. It needs to save some of its own industries."

This more inward-looking approach extends to government pools of capital in Russia and elsewhere. "Sovereign wealth funds have drawn back their claws," says Jai Pathak, a partner with Gibson, Dunn & Crutcher LLP. Pathak specializes in cross-border M&A. "They've had to rethink where they're going."

In the Gulf, for example, the Kuwait Investment Authority invested a total of $5 billion in Citigroup and in Merrill Lynch & Co.; both investments now are worth a fraction as much. After the financial meltdown, though, the KIA turned its attention to the emirate's own battered stock market and pumped in funds there.

Nearby, the Qatar Investment Authority demonstrated the same trajectory. In 2007 and the first half of 2008, Qatar's sovereign wealth fund regularly made headlines as it invested billions of dollars in Barclays plc, Credit Suisse Group, the London Stock Exchange and British supermarket chain J Sainsbury plc, while promising Western Europe much more. Now, all talk of supersized acquisitions in Europe has stopped cold. Toward the end of last year, the authority announced it would buy major stakes in Qatar's publicly traded banks.

Dubai's problems are even more acute. In 2007 alone, Dubai government-related entities invested billions in Deutsche Bank AG, HSBC Holdings plc, EADS, Barneys New York Inc., Nordic stock exchange OMX, MGM Mirage, Sony Corp. and Singapore shipbuilder Labroy Marine Ltd. Now, Dubai is scrambling to contain one of the world's biggest real estate market crashes, which threatens to take the emirate's economy with it.

In China, the country's sovereign wealth fund, China Investment Corp., pretty much opened for business by laying out $3 billion in Blackstone Group LP and $5 billion in Morgan Stanley, high-profile investments that both proved immensely bad bets. Since the September crisis, CIC has focused on pumping money into the country's major banks. This month, CIC's chief executive, Lou Jiwei, told reporters the fund will continue to invest overseas. Don't believe it, says a Shanghai-based private fund manager. Big-time investments in Western financial institutions, he says, "aren't going to happen again, at least not for a long, long time."

This highly uncertain environment gives pause to well-heeled private sector investors as well. Even those companies with strong balance sheets, ready coffers and a desire to gain offshore markets are in no hurry to move.

Buyers "are saying, 'Let me see another month's performance, let me see another month's performance' as verification or a reinforcement that deals are going to hold up," says Michael E. Gibbons, senior managing director of midmarket M&A shop Brown Gibbons Lang & Co. LLC, which is also the U.S. partner in a consortium called Global M&A. "On Sept. 1," he adds, "we had 10 letters of intent signed. Two have died. Most of the others are chugging along."

Attention is once again focused on Japanese corporations and banks, which have already gone through a painful restructuring and appear well-poised for deals. "Japanese companies will come back," Pathak says.

Take privately held food and beverage manufacturer Suntory Ltd. In October, Suntory paid €600 million for Frucor Beverages Group Ltd., the Auckland, New Zealand-based nonalcoholic beverage company owned by Groupe Danone SA. After the announcement, a Suntory executive told Reuters the company was willing to spend a further $2 billion on acquisitions. Suntory's rival, Kirin Holdings Co. Ltd., also signaled its desire to expand through acquisition when it announced Jan. 19 that it wants to buy 43.25% of Philippines beermaker San Miguel Brewery Inc., a purchase valued at about $1.2 billion.

But there's no rush. As time goes on, not only may prices fall further, but there will be more candidates. The betting is that megamergers are forced to at least partially unwind. InBev SA's $52 billion acquisition of Anheuser-Busch Cos., for example, was financed by $45 billion in senior debt. Paying off debt will probably necessitate some divestiture of assets.

The dog days of winter won't last forever. Lawyers and bankers believe cross-border M&A activity will pick up the second half of this year. Some of this may be wishful thinking. But there's a big force looming to break the current stasis: distressed asset sales.

"We're seeing few deals that are completely voluntary," says the investment banker, who asked not to be identified. "We're seeing more deals where there's pressure to sell now."

"A lot of deals we're seeing may not have been distressed before," quips Gibbons. "They are now."

Take print media. Earlier this month, Mecom Group plc, a London media company crushed by over-indebtedness, said it was selling its German newspapers and online properties to a Cologne-based newspaper group, M. DuMont Schauberg GmbH & Co. KG, for €152 million. Later that week, word got out that Russian oligarch Alexander Lebedev was negotiating to buy London's Evening Standard, another ailing concern.

Airlines represent another sector under stress. While merger talks between British Air plc and Qantas Airways Ltd. broke down in December, the British carrier is now in discussion with Iberia Líneas Aéreas de España SA. Last month, Air France-KLM agreed to pay €323 million for a 25% stake in the bankrupt Italian carrier Alitalia-Linee Aeree Italiane SpA.

The ultimate distressed cross-border deal came in September when Lehman Brothers Holdings Inc. went bust. Days later, Britain's Barclays bought Lehman's North American operations, while Japan's Nomura Holdings Inc. acquired assets in Asia, Europe and the Mideast.

The pace of that kind of forced sale activity should accelerate in the months ahead, for companies both in and out of bankruptcy. The bankruptcy filing in January of Nortel Networks Corp., for example, should create a fire sale of divisions around the globe as analysts expect the telecom equipment manufacturer to be broken up and sold off piecemeal.

"Highly geared companies are in trouble," says Giles Boothman, a London-based partner specializing in restructuring and insolvency at Ashurst LLP. Forced sales will increase, he says, as will the sale of "leveraged assets." Many of these transactions are now in the works, but not yet announced, add Boothman and other restructuring lawyers. "They just take a long time to do," Boothman says.

Boothman predicts the rise in Britain of what is termed "prepackaged administration," somewhat akin to a prepackaged Chapter 11 in the U.S. A company appoints an administrator. On the day of appointment, the administrator sells the entire business to a new company. But unlike a prepackaged Chapter 11, this kind of transaction never goes before a judge.

More traditional cross-border deals should follow as well, especially in the middle market. Large, publicly traded companies have "internal troubles at the moment and can't look beyond their borders," says Markus Wenserski, a Frankfurt-based partner at Faegre & Benson LLP. But in the midmarket, he adds, larger firms will buy up smaller ones to expand specific niches, citing everything from engine manufacturing to adhesives.

Shane Byrne, a San Francisco-based partner at Baker & McKenzie LLP, sees it from the other end. "In-house, we probably have three or four domestic companies divesting businesses," he says. "We're definitely seeing foreign buyers, mostly Europeans."

In a recent study commissioned by Merrill Corp. on global, midmarket M&A, 43% of respondents believe cross-border M&A will increase, the same percentage that believe midmarket M&A as a whole will decrease this year. Germany will be the most resilient of the European countries, respondents believe.

While large, leveraged deals, especially those involving private equity, are dead in the water, bankers and lawyers are attempting to craft deals that avoid both cash outlays and loans. One lawyer describes what sound like variations on the theme of barter: "I'll sell you my asset in China. You sell me yours in Germany." Or, he adds, there could be a joint venture, "in which one party puts in one division, another puts in another division. They work this for a while," and see whether they can eventually unload the assets.

As the RWE acquisition of Essent shows, the M&A landscape isn't completely devoid of larger cross-border deals. In the case of Essent, it had unsuccessfully attempted to merge with domestic competitor NV Nuon a year earlier. That was a much bigger deal that got snagged on internal Dutch politics. But the desire of government owners to get out of the business remained strong. "They have little influence and potentially a lot of risk, so they sell," Koster says.

That sort of cross-border acquisition also makes sense in the current environment, Koster adds. "To some extent, it doesn't follow the economic cycle as close as do other industries," Koster believes, since demand is in part, at least, inelastic and revenues are more predictable. And, he adds, there are "other drivers working for a merger like this." Koster lists a move toward consolidation in power and utilities as well as a liberalized regulatory regime that makes cross-border deals more obtainable. Koster, who specializes in energy and infrastructure M&A, says he's involved in other deals as well. "It's a bit bizarre," he says. "We are working our tails off."

Infrastructure-related M&A is a notable exception to the lack of transactions and not just in Europe, says Pathak, who splits his time between Singapore and Los Angeles. In addition to roads, these sorts of companies include ports, airports, power and telecommunications. "Some new deals are getting done, particularly in infrastructure. And these are not necessarily troubled."

Expect telecommunications to be especially active, some lawyers and bankers believe. On Jan. 14, for example, the Philippines' Liberty Telecom Holdings Inc. announced a "substantial" equity investment by Qatar Telecommunications, which already owned a 27% stake in the wireless voice and data provider through a Qatar-Saudi joint venture.

Citibank's Itinere Infraestructuras deal also represents the junction between infrastructure and distress. Crushed by huge debt and choked by the rapid downturn in the Spanish property market, the seller, Madrid-based construction company Sacyr Vallehermoso SA, is offloading assets in a desperate attempt to stay in business.

As M&A advisers attempt to figure out where activity is likely to come from, many look to sectors that are by their nature increasingly integrated across borders: utilities, energy, financial services, pharmaceuticals and some kinds of technology. "There will be consolidating activity," says a lawyer. "Those kinds of things can't stand still for long."

Right now, "there's insecurity where the market is going," says Allison Dent, co-founder and managing partner of Montreal-based investment banking boutique Synergis Capital Inc., and another member of the Global M&A alliance. "You're going to see an increase in cross-border transactions. The relationships are in place. They're going to get done. But it may take 12 to 18 months."