They'll strike some deals and earn a good living. But M&A bankers aren't likely to reclaim their once-powerful perches anytime soon.

Amid cautious talk of economic recovery, more than a few substantial equity fundraisings and, most importantly, an increasing investment banking fee pool, M&A fees are falling faster than the decline in M&A activity. As a period of large-scale state intervention winds down, it exposes a striking lack of depth in the M&A market.

If this trend is medium- or long-term, then M&A is unlikely to soon produce the stars of European investment banking as it has in the recent past -- dealmakers like Michael Zaoui, a longtime and well-regarded advisory banker before he retired as vice chairman of the Institutional Securities Group at Morgan Stanley in 2008. If it yields little in fees, then M&A's glamour, and its ability to accommodate both bruising dealmakers and serious thinkers, will count for very little.

A recent report by Thomson Reuters and Freeman & Co. LLC finds that advisory fees in Europe fell 64% from the first quarter to the second quarter, to $3.4 billion. Completed European M&A declined 58% to $345 billion and announced M&A was down 42.7% to $760 billion. M&A's share of the pie, at around 20%, is at its lowest since 2006. With an eight-year average of 41%, the share had never previously been lower than around 30%.

The decline in the total number of deals was, on the face of it, less dramatic, dropping from 7,000 to around 6,300. Nor has there been a lack of megadeals: There have been 11 deals valued at $5 billion or more this year as against nine in the first two quarters of 2008.

But the deals that really generate the fees, say bankers, are those worth between $1 billion and $5 billion, and these are rather scarce. According to a detailed breakdown research firm Dealogic provided, there were only 47 deals in this category in the first half of 2009, compared with 122 in the same period last year and 154 in 2007.

Such deals generate better-quality fees, typically just under 0.5% of transaction value, because they frequently have sole financial advisers on each side and are usually free of, in a way megadeals aren't, publicity-seeking firms inclined to provide more finance than deal advice. Transactions such as GlaxoSmithKline plc's $3.6 billion acquisition of Stiefel Laboratories Inc. are cases in point. Blackstone Group LP was sole adviser to Stiefel, as Lazard was for GlaxoSmithKline.

League table glory can sometimes be more important for banks than fees. Few bankers would argue in private that the presence of five advisers on the BlackRock Inc. side of the $16.5 billion deal with Barclays Global Investors was essential. Barclays was fairly restrained, using only three banks.

Bankers say a long list of advisers doesn't mean that the overall fee pool is any bigger, as firms sometimes provide services for a minimal fee, or even for free, and cross-sell other products.

Another factor emerging in recent months has been the importance of work for the state, which traditionally pays very low fees to bankers, expecting that they will be only too pleased to take on high-profile mandates.

The fourth-biggest deal in the world in the first half of the year is an important example. The U.K.'s Treasury took a majority stake in Royal Bank of Scotland Group plc in a deal with a league table value of $22.3 billion, but the fees paid out will be far less than for a normal corporate deal.

M&A bankers should nonetheless be grateful for such largess, since many favored clients, such as private equity firms, cannot find financing and have almost disappeared from the market.

Thomson Reuters reports that buy-side financial sponsor activity has dropped to 2.6% this year, its lowest share since 1998. Until such clients find deal financing, which Freeman does not expect to see until next year at the earliest, then M&A could end up as the poor cousin of equities.