September kicks off in style but M&A advisers aren't ready to get their hopes up

After all the talk about how much hinged on September, for M&A lawyers the post-summer kick-off couldn't have gone much better. Nine out of 10 economic indicators have been pointing north for the last month, the FTSE 100 last week broke back through 5,000 – marking a five-month revival – and this month has seen a string of notable bids. In particular, Kraft's £10.2bn unsolicited offer for Cadbury's, which threw up roles for Clifford Chance (CC) and Slaughter and May, was exactly the kind of deal needed to give the market a lift after nearly 15 months of strategic buyers sitting on their hands. Add in the joint venture talks between T-Mobile and Orange – CC again and Norton Rose – and it seems a growing number of trade buyers are calling the bottom of the market. This potentially clears the way for non-distressed M&A activity to revive after the enforced stasis since the collapse of Lehman Brothers a year ago.

Still, M&A lawyers, as a breed always reluctant to lead sentiment and call a turning market, still appear too shell-shocked from a punishing 12 months to get their hopes up. "A big deal pushing the FTSE up and a telecoms deal doesn't constitute full-blown recovery," says Tim Emmerson (pictured) of Sullivan & Cromwell, before conceding, "What it tells us is the financing markets are back open for M&A, which puts the brakes on any worry of another collapse."

Nevertheless, even the most cautious partners admit the outlook has improved since the spring, even if clients looking to do deals are largely restricted to bluechips with plenty of cash or impeccable credit lines. Sectors highlighted include pharma, telecoms and mining – though the balance sheet matters more than industry or geography – and banks are beginning to chatter about initial public offerings coming back in the first half of 2010. While the current quarter will remain deathly quiet by the standards of the last decade, it is now possible to imagine a genuine, if modest, revival in Q4, which continues to build in the first half of 2010.

Linklaters' Tom Shropshire observes: "The industry logic for combinations has been there throughout the recession; it has only become more compelling as certain corporations have become weaker. We are seeing corporates make positive value judgements and take their opportunities."

Michael Hatchard of Skadden Arps Slate Meagher & Flom agrees: "Balance sheets have been managed, costs have been cut and strategic investments are now inevitable at the right price absent another major wobble."

But even a substantive upturn in activity will leave M&A subdued by historic standards, and the outlook for private equity, which has seen a renewed bout of turbulence in recent weeks, including bust-ups at Alchemy and France's PAI, still looks gloomy.

Much also will rely on credit continuing to loosen (though interbank rates are sending out positive signals on this front). But viewed another way, the credit cycle looks in favour of the market, since it is likely to steadily improve, providing underlying support to deal-doing. As Jones Day's Peter Baldwin says: "If [lending increases], scores of people will return to the market."