Beneath the hype and bombast, the market has already slowed considerably

With all the press surrounding the seemingly endless stream of audacious corporate bids – Alliance Boots, ABN Amro and EMI among them – it might seem incongruous to ask, but how busy is the M&A market?

Scratch beneath the surface and a different picture from the flashy takeover headlines begins to emerge. Partners at firms of all sizes are privately conceding that the mid-market that underpins most firms' revenues is currently only chugging along.

"I definitely have a sense that the mid-market is not as busy if you compare the past 12 months with the previous year," says one partner at a top 30 firm.

"We are noticing that there are huge deals around and plenty of lawyers talking about doing huge deals, but it is often the case that the things they are looking at are not actually happening," concedes one partner at a US firm in London.

Such comments are backed up by Mergermarket research, which suggests that the number of completed deals in the UK and Europe is substantially down – not just on last year but the previous two years. During Q1 2007, the number of completed deals in Europe fell by almost 30%, dropping from 1,432 to 1,104, while ranked UK transactions fell from 501 in Q1 2006 to 362.

It is a sharp contrast to the surging value rankings (always more volatile and less reliable indicators) and figures for announced deals and strongly suggests that a significant amount of speculative bid activity is not translating into legal fees.

Admittedly, for European deals the average transaction value is slightly higher this year but that must be small consolation to those firms watching competitors brag about how busy they are while seeing their own teams go quiet.

Many mouths to feed

It is not just the firms more closely associated with mid-market work like Olswang, CMS Cameron McKenna or Macfarlanes that will be affected by this change in activity levels.

With more mouths to feed, the bigger firms are just as dependent on a flow of smaller deals alongside the big-ticket mandates to keep their profits up. As one partner comments: "It is not just the mid-market firms that are affected. The magic circle need a high volume to keep them busy; if that goes down there are a lot of people needing work."

So what is the reason for the slowdown? Some blame distortions created by the level of bids from private equity houses, which are competing head-to-head for a limited number of trophy assets. A related trend has seen a lot of under-performing companies garner large equity premiums as investors position themselves to benefit from acquisition targets. Either way, some trade buyers, despite decent corporate earnings and manageable debt, are staying out of the market.

Whatever the reason, it is hardly the end of the world. Mid-tier law firm results so far this year suggest even the laggards are doing OK – even if the pace has slowed from 2006-07.

But more importantly, signs that the underlying deal market is slowing down well before reaching the boom-and-bust conditions of 2001-02 raises the odds that a prolonged deal slump can be avoided this time in favour of a gentle landing.