Jeffrey Kaplan's 24-year run as a dealmaker is coming to an end. The global head of mergers and acquisitions and corporate finance at Bank of America Merrill Lynch is joining David Tepper's Appaloosa Management LP hedge fund as chief operating officer.

"It was a different opportunity," Kaplan, 49, says of the move. "It gave me the opportunity to impact an organization, not as just a deal guy, but as a business executive."

Kaplan won't be working on the investment side of Tepper's business and isn't there to run acquisitions for the fund. Instead, he'll manage Appaloosa's relationships with limited partners and banks.

It will be a dramatic change for Kaplan, who has spent the bulk of his career working on deals, almost exclusively at Merrill Lynch & Co. and at the combined Bank of America Merrill Lynch. Kaplan joined Merrill in 1987 after receiving an M.B.A. from New York University. He started in the bank's high-yield group and then shifted to M&A. In 1992, he decamped to Ronald Perelman's buyout vehicle, MacAndrews & Forbes Holdings Inc., where he helped to build out its Marvel Entertainment Group Inc., New World Entertainment, Revlon Inc. and Coleman Co. units.

"It was a good opportunity to be involved in not just the deal business, but to get closer to the businesses from the strategic and operational side," Kaplan says. He was lured back to Merrill in 1996 by Jack Levy, then head of Merrill's M&A group.

In subsequent years, Kaplan became head of Merrill's financial sponsors group, where he advised on some of the largest buyouts of the 2005 to 2007 private equity boom, including the $33 billion take-private of hospital operator HCA Inc., the $15 billion acquisition of Hertz Corp. by Clayton, Dubilier & Rice LLC, the Carlyle Group and Merrill Lynch Global Private Equity, and Kohlberg Kravis Roberts & Co.'s $29 billion acquisition of credit card payment processor First Data Corp. When Bank of America Corp. bought Merrill in late 2008, Kaplan became global head of M&A for the combined firm.

Days before announcing his plans to join Appaloosa, Kaplan sat down with The Deal magazine for a wide-ranging interview on the outlook for M&A in 2011, including cross-border activity and the future of private equity. Excerpts from that conversation follow.

The Deal magazine: What's the outlook for M&A in 2011?

Jeffrey Kaplan: The M&A outlook is very positive. We saw not only a strong 2010 after we thawed out from the freeze of 2009, we also saw a trend where the second half of 2010 was stronger by about 25% from the first half. That momentum in the business is now continuing through the early part of 2011 and accelerating in the first part of this year.

All of the conditions that existed over the past 12 to 18 months that have helped elevate M&A both domestically and globally continue today and are strengthening.

It starts with the health of corporates. You have companies that have focused on balance sheet repair, focused on cost and margin improvement, and are now stable and positioned for growth, and we've seen a real appetite to increase revenues through acquisitions.

On top of that, we continue to have strong financing markets, equity valuations that have improved but are still reasonable and attractive. You have real strength with corporate buyers seeking strategic acquisitions, and the private equity buyer has experienced a resurgence with substantial equity capital and strong high-yield-bond and leveraged-loan markets.

What about the sellers? What's motivating them?

Sellers in this environment will be focused on growing and improving organically and independently or considering combinations with larger players, particularly in sectors that benefit from strategic consolidation, either cost-driven synergies or geographic synergies. That's particularly true in sectors that are affected by scarce natural resources such as oil and gas. It's not M&A for the sake of being bigger but for the sake of being stronger, healthier and positioned for growth.

Where are you seeing deal valuations?

We're certainly not in an M&A bargain cycle right now. Typically, where there's great opportunity in terms of valuation in the cycle, buyers are often taking the greatest risk because there's uncertainty in a business, geography, a cycle or the world economy. Therefore I think it's a particularly good time now for M&A because although valuation levels have risen and companies are more expensive, there's more stability and certainty of outcome from an M&A point of view. In large part, corporate or private equity buyers are comfortable paying a premium for that stability.

Now is a good time for many companies to consider deals, but the deals we're seeing announced today have been gestating for six months. When you think about the Duke-Progress deal, Beckman Coulter or the Pride deal, these are deals that have been on the chalkboard for a number of months, where corporate boards, either as sellers or buyers, have been considering their options in an environment that was less certain; where the outcome was a greater risk. Companies have now moved to the point where they are deploying their balance sheet cash, and they are accessing good long-term financing. They are, in the context of more recent deals, using their stock as currency.

We've seen a more recent wave of stock-for-stock deals. For example, take AMB's $8.7 billion stock-for-stock acquisition of ProLogis. Boards are trying to mitigate risk and ensuring that there's balance sheet safety in a deal.

We've seen a fair number of high-profile hostile deals. What's driving those?

The volume of hostile deals increased 60% from 2009 to 2010. You've had hostiles like BHP's bid for Potash, Sanofi for Genzyme, Air Products for Airgas.

When you see hostile activity, it's really a statement of confidence from a buyer, a statement of confidence in the target, confidence in the M&A market, confidence in the financing, confidence in shareholder reaction.

But it's obviously the last tactic that we advise a client to pursue. The biggest risk to the deal is the uncertainty of outcome and the implications for the company and its shareholders if a deal is to fail.

The deals you mentioned took a long time, and their outcomes were uncertain. BHP-Potash and Airgas-Air Products were notably unsuccessful. Is it tougher to get these deals done now?

It is. If you look at hostile deals statistically during the 2000 through 2005 period, only about a third of companies remained independent once a hostile was launched, i.e., two-thirds of the time the company would be sold to either the prospective hostile acquirer or another third party. By 2006, the statistics shifted such that more than half the time targets remained independent.

I think there are a number of factors at work. Number one, shareholders are sophisticated, and they form their own views. It's not like in the past, where a proxy advisory firm or solicitor made a recommendation and all shareholders followed. Informed shareholders have their own view of management, a view of value, and they're often willing to support and stick with incumbent management teams. That's created a higher level of support for targets.

Sometimes the rejection of deals is driven by noneconomic factors. BHP-Potash was a perfect example where there were national concerns involved. They were dealing with the natural resources of a country and also with a substantial number of local jobs. In that situation, there could easily be overriding governmental and regulatory concerns around hostiles.

In some cases, I think even though the logic of the combination can be good for an acquirer, successfully winning a proxy contest takes time and resources and creates uncertainty and questions from acquirer shareholders.

"What if we're not successful?" When Kraft went after Cadbury, the question was how much risk will Kraft take. If Kraft is unsuccessful, what does that say about the existing business plan, absent the combination with the target? So it is a high-degree-of-difficulty type of deal.

Hostiles are more episodic than they are sort of thematic, but I think we'll continue to see more hostiles because the ingredients that make for a good acquirer's environment still exist.

Shareholder activism is a corollary to hostiles. Activism is more of a thematic trend where strong, well-funded, credible shareholders can take a position adverse to management to drive change -- whether it's a sale or a spinoff.

It's not the activism of the past, where a small shareholder without institutional credibility can motivate the sale of a company. It's really for the well heeled, the Carl Icahns of the world or the William Ackmans. That's where I see a theme of activism: well placed, and having a real effect in the boardroom. It can lead to unsolicited activity, but typically less so.

One issue that's come up, particularly in Airgas-Air Products, is the poison pill. What's your read of the sort of M&A protections that boards have installed? Are we entering a new era in the governance debate?

Yes, I think we are. I think protectionism as part of corporate governance is not favored. It's not supported. The evidence is that pills generally these days will lapse and will not be reinstituted. There was a point where a substantial number of companies had poison pills, maybe greater than half, and today it's far, far less. It's really not a form of protectionism that a management team wants to bring to its shareholders through a proxy vote.

Of course, you do see them, and companies can pull them off the shelf quickly to use in defensive situations, but the overall culture of governance today is to not create defense around a particular management team. It's to allow the market, shareholders and a board to make decisions that are economically sound, irrespective of bylaws and governance.

It's been highlighted by activists but pushed by shareholders in general. Shareholders are enlightened, sophisticated and really demand this. In addition to activists, you have the proxy solicitation firms and advisers that also recommend good governance and limitations on defensive protections and barriers.

Let's talk about private equity. Where do you see it playing a role in M&A?

Private equity will likely grow as a percentage of the overall M&A market.

It comes from some of the same basic fundamentals: strong debt markets, the private equity dollars out there -- $400 billion-plus of private equity money that can be deployed. We're still coming off of fundraisings that were substantial in some cases, as much as $20 billion per fund. That's not really replicable in the market today, but the existing funds represent large cash equity hoards left to invest.

So with all that we've seen, there's been an increase not only in the sale of private businesses to the PE firms, but also public companies. Look at EMS selling to CD&R. Companies that don't see a better strategic alternative with corporate acquirers or don't see their public standalone prospects being superior will seek to go private.

The deal sizes also have increased, from $1 billion to $3 billion to $5 billion. Look at the recent wave of deals: EMS at $3 billion, NBTY at $4 billion, Tomkins at $5 billion, Del Monte at $5 billion. If you followed the press on Sara Lee, there was a reported buyout proposal for a company $15 billion in size.

There's been talk of a $10 billion deal ever since a private equity consortium's unsuccessful attempt to buy Fidelity National back in early 2010. But it seems anything beyond $5 billion is a bit difficult for private equity firms. Why is this?

In this environment there are a couple of complications in deals of size. One is, can you do an $8 to $10 billion financing? Is there enough depth in the market to support that? And is there enough underwriting support for banks to carry that risk and then distribute it to the market?

With regard to the equity, to get to deals $10 billion and above, you would have to consider equity of at least 30%. That means $3 to $4 billion of equity, which represents $1 billion-plus equity investments from multiple firms.

We've seen a reluctance of private equity firms to pile into consortiums where the governance is distributed and where you're making substantial investments but you're not fully controlling the outcome. Therefore it's a little bit less practical than it was to combine private equity firms to carry off deals of that size.

Why the reluctance to form consortiums? There's been talk of some stress in the boardrooms where we saw the consortium deals, but we haven't seen those consortium deals blow up because of it.

It's the general conservatism around financial structure and control. Private equity is shifting its business model slightly. The larger private equity companies have become big asset managers; some of them are now public. And I think in evolving the business model, the notion of controlling companies and controlling outcomes in a good or bad environment is the preferred investing thesis of a private equity firm.

The limited partners also have a view and a voice, and LPs can find themselves with multiple general partners in the same deal. This is not a negative per se, but doesn't create the diversification that LPs are looking for.

I think the private equity firms have been responsive to some of the LP dynamics. It's been a tougher fundraising environment, and, therefore, I think GPs are not only mindful of their LPs but they're often working together and partnering with them. You're more likely to see an LP partner with its GP than multiple GPs coming together. That's the preferred structure.

Let's talk about the debt markets. We're seeing the return of covenant-lite deals, the high-yield markets have been going gangbusters for over a year now, and loan markets seem to be reviving. There's actually talk of bubblelike conditions. What's your sense of that?

Markets are very strong. Some of that is driven by technical factors: funds flowing into the high-yield and leveraged-loan markets.

This is an environment where yield is the goal, and it can't be achieved meaningfully in Treasuries, in investment-grade corporates or in munis. That makes the spread of high-yield bonds to Treasuries attractive. Therefore, those technical factors are pushing more and more dollars into the buy side, but I don't think that will persist forever.

Our hope is that it's a rational market that is at the aggressive end from an issuer's perspective, which for both corporate and private equity acquirers is creating great benefit today, especially in long-term fixed debt, and it will find a market level that's sustainable at some point this year.

How much of an issue for private equity firms are the overleveraged deals from the 2005-2007 era? Do you think that the fact that we went through probably the worst financing crisis of our lifetime but the default rate didn't really go up that high suggests they dodged the bullet?

I think the capital markets are in the process of repairing all the world's balance sheets, both corporate and private equity. The big deals of 2006 and 2007 not only have benefited from a recovery in the debt markets -- we've seen them chip away at those $20 and $30 billion debt capitalizations -- but I think, even more importantly, you'll also see the public equity markets opening for these companies this coming year.

If you looked at Nielsen's IPO, it was greatly oversubscribed. HCA has been filed for sometime, a number of other companies are not far behind, and, therefore, the capital markets can provide a solution to the debt problems.

We saw the purchase of great companies and huge franchises in First Data, TXU, Clear Channel and Univision. These were all very good businesses. The question is, at those valuations with those financing levels, will they yield good returns? I expect a number of them will. What the equity returns on those deals will be varies by deal and depends greatly on the sector and expectations as much as anything. So I wouldn't universally classify all those deals as troubled or bad equity outcomes for the private equity shops.

What do you see happening in terms of private equity firms changing their business model?

The bigger firms do see themselves as broad asset managers and have diversified themselves and their capabilities. A Blackstone can now look at an opportunity and invest money in the traditional form of equity at the bottom, or higher in the capital structure through GSO Capital and a mezzanine investment, or also through many of its funds into the bank debt and leveraged-loan market.

I think the firms also consider the need for permanent capital as opposed to fundraising through every cycle. Blackstone is public, KKR is public, Apollo is semipublic, Oaktree is semipublic as a hedge fund, and Och-Ziff is public. It could make sense for the Carlyles of the world to consider similar moves. The business model has clearly shifted for the bigger guys.

What about KKR? They're building out capital markets expertise and seem to be leading the way in an area Blackstone has so far avoided. Do you think that that's pointing to another direction for private equity firms? Are they going to become more like universal shops to some extent, with their own underwriting capabilities?

Some will, but not all. I think it's a good business model for KKR. They're at the forefront, and I think they positioned themselves successfully on the capital markets front; they have developed an expertise in capital markets through a group of hedge fund professionals. They can consider different approaches to dealmaking and have the capability of playing the capital markets side of dealmaking, which is not historically what these firms have done.

I think it will serve some of the firms well. But I think, like in the investment banking world, where there's a place for universal banks like J.P. Morgan and BofA, there's a place for just investment banks, and then a place for boutiques. Different business models will suit the different firms.

Is there any worry that KKR is moving into some quasi-investment banking businesses that will put it in competition with its banks?

I think that aspect of the business is really more complementary to what we do. I don't think it can, nor should it, replace what we do. For example, we take companies public. It's hard to create infrastructure, distribution and research to support big IPOs.

You also need balance sheet capacity to underwrite and lend to LBOs. I don't think private equity funds can self-finance the debt side. So I think their involvement is generally complementary and doesn't seek to replace what we do because it would be too challenging.

What's your outlook for cross-border deal activity in 2011?

Cross-border is probably the most important M&A theme that we've seen in the past year to 18 months and will see in the coming years. Cross-border activity was up almost 70% in the Americas.

Look at some of the larger deals of this past year -- even some that didn't come together -- BHP-Potash was Australia to Canada; Sanofi-Genzyme was France to the U.S., PetroChina-Encana was China to Canada.

Latin America will be a big acquirer on the resources side. And we've seen great activity out of Russia and have great expectations for China as an active buyer. We see the geographic boundaries for M&A really being lowered and companies of scale looking at global strategies for growing their business and looking at global targets.

What kind of tensions does that create? Are we seeing any backlash? Is there a natural nationalistic tendency that rises up as part of this?

Free trade will prevail, but I think nationalism is a relevant component to assessing the viability of M&A deals. It should not be ignored.

Recognizing that there are national issues, in BHP-Potash, for example, is also important. In that deal there was a focus on the indigenous issues of jobs and the importance of national industries to governments. An acquirer in the context of these types of cross-border issues can cultivate regulators, can cultivate shareholders and improve the odds of being successful.

But not in all cases. I think it depends on the geography and the respective rule of law in each of those geographies. There are issues and risks, whether it's business in China or Russia, but also great opportunities with large companies, natural buyers of assets and natural sellers of assets.

The theme will be one of continued global expansion with the caveat of measuring risk, receptivity and the rule of law by geography. A good example might be right in our own backyard, as we evaluate the response to a potential NYSE-Deutsche Börse tie-up.