The first quarter of 2008 ends with few surprises or cheer for deal lawyers.

Glancing at the deal leagues, M&A activity fell substantially on both value and volume measures to levels last seen during the quieter moments of 2004. As expected, North America and Europe bore much of the brunt of that slowdown and big-ticket private equity deals pretty much vanished. According to Mergermarket, leveraged buy-outs constituted seven of the 10 largest deals in the first half of 2007 but not a deal so far in the largest bids of 2008.

The rays of sunshine have been as well foretold as the gloom, with Asia, key emerging markets and mid-market M&A to a considerable extent maintaining activity levels. Likewise, in sectorial terms, few would have been surprised to see mining and commodities bids dominating the league table, with BHP Billiton's $211bn (£107bn) bid for Rio Tinto helping the sector to constitute no less than 40% of global M&A in value terms.

Taking a broader view, as underlined by Mergermarket's Global M&A and Debt Market Outlook, the familiar picture of tighter lending, lower equity issuance and expectations of more corporate defaults emerges.

Given the conditions that deal lawyers became used to from the latter half of 2005 through to last August, it must seem quite a downer. But it is worth keeping a little perspective. While no great shakes for M&A, 2004 was a solid, if unspectacular, year by most yardsticks. Likewise, it was always clear that Q1 would be a tough period for dealmakers with highly-depressing mood music being supplied in liberal quantities by the trading statements from crunch-afflicting banks.

It also has to be said that, for what has been dubbed a dead market, there has still been a notable stream of big-ticket mandates, including the aforementioned Rio/BHP bid, the ongoing Microsoft/Yahoo! tussle and the takeover of Scottish & Newcastle. Then there is the stream of capital injections into Wall Street banks and work-intensive deals such as Northern Rock.

Solid as a Rock

But, while far from a wipe-out, current conditions can be brutally uneven for M&A advisers. The sense is that an instruction like Northern Rock can make a real difference to M&A teams. And for the first time in a while there appears to be a real distinction between the law firms in bullish mood and the downbeat. Those giving a good impression of optimism include Allen & Overy, Freshfields Bruckhaus Deringer, Norton Rose, Lovells and CMS Cameron McKenna, which as a group have very little in common.

Likewise, the unsettled mood that has become prevalent among the City arms of US law firms is surely no coincidence. With practices typically led by finance and under-resourced in busy non-cyclical areas like tax, competition and financial service regulation, these are challenging times for Americans in London.

So how much longer will these market conditions continue? The clear consensus among bankers and corporates is that financing terms will have substantially eased by the first quarter of 2009, if not the last quarter of this year.

A key factor will also be whether strategic buyers return to the market. So far they have been wary, in part because of expectations that target assets may yet have a way to fall now that private equity interest has stopped propping up valuations. But this group are still sitting on pretty healthy profits and balance sheets. Given that the global economy still looks on course for solid growth this year, the medium-term outlook could be a lot worse.

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