Party on, Garth

As stocks languish in or around bear market territory for 2008, neither their dismal performance nor a sluggish private equity market have been able to dampen M&A. With $597 billion in strategic M&A through June 25, the U.S. is just 2% off of last year's pace, itself the best since 2000, according to Dealogic. Even including PE activity, the U.S. market is still on pace to top 2005, a very good year for dealmakers.

June alone saw seven of the year's 20 largest U.S. deals or bids, topped by InBev SA/NV's $46.5 billion offer for Anheuser-Busch Cos. Both that offer and Mars Inc.'s $23 billion acquisition of rival candy maker Wm. Wrigley Jr. Co., announced April 28, rely heavily on debt financing, a source of money that has dried up for PE shops seeking to match last year's megadeals. And Spain's Abertis Infraestructuras SA led a group of investors that agreed to pay $12.6 billion for a 75-year lease to the Pennsylvania Turnpike on May 19, the largest infrastructure deal in the U.S.

"It has to do with the amount of leverage you're putting on as opposed to the gross amount of the borrowing," says Frank Aquila, a partner at Sullivan & Cromwell LLP in New York who's representing InBev. "If you're borrowing $100 million and the leverage is 10 times, that may be a hard deal to get done. If you're borrowing $50 billion and the leverage is 3.5 times, and the borrower is going to be investment grade when the dust settles, you're probably going to be able to get that deal done."

The offer by Belgium's InBev has attracted significant attention in Washington, and it reflects the greater presence of foreign companies throughout the U.S. M&A market. In the first half of the year, foreign bids for U.S. targets accounted for six of the 20 largest U.S. offers, compared with none in 2006 and only one in 2005. Foreign acquirers accounted for 22% of U.S. M&A activity, just under last year's 23%. The figures are the highest since at least 1995. But the strong euro hasn't kept U.S. companies from bulking up in Europe; the $84 billion in U.S. to European M&A in the first half is off only 3% from 2007, itself a record year for such activity.

U.S. activity has been dispersed across many industries in addition to consumer goods. The technology sector saw Microsoft Corp.'s failed bid for Yahoo! Inc. as well as Hewlett-Packard Co.'s $13.9 billion acquisition of Electronic Data Services Inc. and Oracle Corp.'s $7.2 billion takeover of BEA Systems Inc. In biotechnology, Takeda Pharmaceutical Co. Ltd. picked up Millennium Pharmaceuticals Inc. for $8.8 billion while Invitrogen Corp. agreed to buy Applied Biosystems Group for $6.7 billion on June 23.

With commercial banks too busy grappling with their own problems to take on those of a rival, financial services M&A, traditionally a cornerstone of the market, has been muted. Instead, commercial and investment banks and insurance companies have gone to PE and sovereign wealth funds for cash. TPG Capital led a $7 billion investment in Washington Mutual Inc., while Corsair Capital LLC engineered a $7 billion recapitalization of Cleveland's National City Corp. And Lone Star Funds began the second half by agreeing to pay $1.5 billion and assume $4.4 billion in debt to buy CIT Group Inc.'s home lending unit.

All three of those investments are far larger than even the biggest U.S. LBO announced in the first six months of the year, Avista Capital Partners and Nordic Capital's $4.1 billion purchase of ConvaTec, a wound-therapeutics unit, from Bristol-Myers Squibb Co.

"None of our private equity clients are talking to us about $20 billion deals as buyers. The financing markets aren't there for it," said Victor Lewkow, head of M&A at Cleary Gottlieb Steen & Hamilton LLP in New York, which represented TPG and Goldman Sachs Capital Partners in their $28.1 billion sale of Alltel Corp. to Verizon Wireless less than a year after the buyout shops bought the company.

U.S. LBO volume plunged from $390 billion in 2006 and $352 billion in the first seven months of 2007 to $36.4 billion through June 25. That amounts to 5.3% of total U.S. M&A activity, by far the lowest percentage since 2001, but it's also a pace that would easily top annual LBO volume for any year between 1989 and 2004 -- an ambivalence that reflects the fate of the broader M&A market in the first half.