In a Weak Market for Mergers and Acquisitions, Signs of Strength

Paul T. Schnell has worked on some of the biggest mergers announced this year. Even so, he says that the business of buying and selling companies is in the doldrums, the likes of which he hasn't often seen in his three-decade career at Skadden, Arps, Slate, Meagher & Flom.

“I'd liken the M.&A. market to getting over an earthquake and its aftershocks,” he said. “And we had the biggest economic earthquake in 80 years.”

Four years after the financial crisis nearly shut down the markets, the mergers business has been slow to return to the heights it attained before 2008. Deal volume dropped 3.7 percent this year from 2011, to $2.36 trillion, according to Thomson Reuters data.

Despite the doldrums, Skadden has been the leading law firm in the deal industry this year, having advised on 206 d eals worth $326 billion as of Dec. 28. A year ago, it was No. 3.

During the 1970s and 1980s, the New York-based Skadden emerged as a powerhouse in advising on mergers and acquisitions, especially on more controversial deals involving hostile takeovers and proxy fights.

Leading the law firm through this period was Joseph H. Flom, who died early in 2011. He built a specialty in M.&.A. at a time when loosened antitrust laws and deregulation hastened a boom in corporate deal-making. On the back of its pioneering mergers practice, the firm expanded into other areas and geographies, becoming a model for the global mega-firm that today dominates the legal industry.

Mr. Schnell has been among the busiest lawyers at the firm, having advised on transactions like Anheuser-Busch InBev's $20.1 billion takeover of the rest of Grupo Modelo that it did not already own and Pfizer's $11.9 billion sale of its infant nutrition business to Nestlé.

A philosophy major given to professorial disquisitions - his ideal alternative job would be to teach philosophy in high school - Mr. Schnell ascribes the weak deal market to a collective battered psyche that is deterring many executives from going through on deals.

This year, there has been uncertainty over the presidential election, the economies of several European countries and the battle between President Obama and House Republicans over tax and spending cuts.

“You're still seeing a manic-depressive M.&A. market, one that's reacting strongly to positive news and then to negative news,” he said.

And despite a flurry of deals in the last weeks of the year, it's unclear whether the environment is picking up. Nonetheless, merger bankers and lawyers, an ever-optimistic lot, have said that the buzz among their clients for deals has been getting louder. The amount of deal volume announced in the fourth quarter is up 16 percent from the year-ago period, though the number of transactions is down 26 percent.

Deals can be completed, Mr. Schnell said. Directors are increasingly asking their management teams about potential opportunities. And advisers are keeping busy: Mr. Schnell recalled having to cut short a family vacation in London this spring, with business forcing him to keep long hours. “I got to know the graveyard shift very well,” he said.

Still many deals tend to be “bolt-on acquisitions” that add incrementally to an existing business. From June to August, for example, the dollar value of announced mergers plummeted to some of its lowest levels since 2007. Yet at 3,400, the takeover were the second-highest number of dea ls since the summer of 2007, according to data from Standard & Poor's Capital IQ.

“In uncertain times, it's harder to do a bet-your-company type deal,” he said. “Bolt-on acquisitions are safer-sounding and are a safer kind of deal to do.”

Bigger deals require some combination of special features, according to Mr. Schnell, including having well-known brands or serving as valuable entry points to new markets.

Modelo, with its Corona brand and its dominant position in the Mexican beer market, was perhaps an inevitable purchase for its bigger partner, Anheuser-Busch InBev. And the German conglomerate Joh. A. Benckiser had an opportunity to acquire well-known brands when it bought Peet's Coffee & Tea and Caribou Coffee for a combined $1.3 billion.

Not all announced deals are successful, ho wever. Mr. Schnell advised Coty, which is owned by Joh. A. Benckiser, in its unsuccessful $11 billion offer for Avon Products.

Banks are willing to finance deals again as well, including takeovers by blue-chip companies and leveraged buyouts by private equity firms and riskier junk-grade buyers. And more permissive forms of financing, like so-called covenant lite loans that carry fewer limits, are creeping back into the market.

But lenders' eagerness usually extends only to smaller transactions, denting the ability of buyers like buyout firms to strike deals above $5 billion.

Some industries have been buoyed by other factors as well. Oil and ga s remains the busiest industry for mergers, accounting for 14 percent of all M.&A. activity in 2012, according to Thomson Reuters, driven by a seemingly limitless hunger for shale oil and gas properties.

Mr. Schnell remains optimistic about the deals business eventually bouncing back, having seen his share of ups and downs in the market, many spent alongside prominent colleagues like Mr. Flom and Roger S. Aaron. (The expansive office of Mr. Aaron, who died in February, is around the corner from Mr. Schnell's.)

Paraphrasing Mr. Flom, Mr. Schnell said that in most crises, one would wait for the pendulum to swing back. “But in this crisis, you were worried the pendulum would be knocked over,” he said.

That said, he added, “the longer I do this, the more I'm sure you can't predict where things are going.”