The value of global takeovers dropped to the lowest level inmore than a year this quarter, and dealmakers say Europe's debtcrisis may hamper a recovery in 2012 as cash-rich companies holdoff on major purchases.

Mergers and acquisitions have slumped 16 percent from theprevious three months to $457.1 billion, putting the fourth quarteron course to be the slowest since at least mid-2010, according todata compiled by Bloomberg. For the year to date, announcedtakeover volume has risen less than 3 percent to $2.25 trillionafter regulatory hurdles scuttled AT&T Inc.'s bid for T-MobileUSA, which would have been 2011's biggest deal.

Tightening credit markets, the risk of a euro-zone collapse andstock market swings have deterred companies from pursuingtransformational deals that would spur sales growth, M&Abankers said. Earlier in 2011, more favorable conditions emboldenedacquirers to part with stockpiled cash, such as Johnson &Johnson's $21.3 billion bid for Synthes Inc. and Express ScriptsInc.'s $29.1 billion offer for Medco Health Solutions Inc.

“There's definitely pent-up demand for M&A aswell-capitalized companies continue to focus on opportunities forstrategic acquisitions,” said Yoel Zaoui, co-head of global M&Aat Goldman Sachs Group Inc. “The key driver for M&A, however,is confidence, and in Europe, at the moment, that is lacking.”

Seven of the year's 10 biggest deals were announced beforeAugust, when European markets fell the most since October 2008 amida global stock rout and Standard & Poor's cut the U.S. creditrating. Goldman Sachs is the top adviser on global takeovers for2011, with $537 billion of deals this year, followed by JPMorganChase & Co. and Morgan Stanley, Bloomberg data show. Thisyear's growth in M&A volume compares with a 24 percent jump in2010.

Europe's financial crisis will stifle lending, push the regioninto recession and weigh on the U.S. economy through early 2012,Jan Hatzius, Goldman Sachs's chief economist, said on a Nov. 30conference call. The euro zone's unemployment rose to 10.3 percentin October, the highest since the currency began in 1999.

As the European crisis deepened, “dealmakers entered await-and-see mode, and that's where we are now,” said Paul Parker,global head of M&A at Barclays Plc in New York. “Offsettingforces such as companies' cash piles and low valuations shoulddrive the recovery of M&A activity in the second half of theyear.”

The MSCI World Index of about 1,600 companies trades for 12.6times reported earnings, showing equities in developed economiesare cheaper than they've been more than 95 percent of the timesince 1995, according to data compiled by Bloomberg. Thosecompanies are also sitting on $5.3 trillion in cash, the datashow.

Antitrust Hurdles

Companies that did tap funds this year may not be able tocomplete their purchases as regulatory scrutiny threatens to derailmore takeovers. Express Scripts's offer for Medco, which wouldcreate the largest U.S. manager of pharmacy benefits for employers,insurers and union health plans, has prompted state inquiries overwhether the combination would command too much market power.

AT&T abandoned efforts to buy T-Mobile USA from DeutscheTelekom AG this month after the U.S. Justice Department sued thecompanies in August, saying a combination would substantiallyreduce competition. Companies contemplating similar deals may holdoff until the next presidential election in the hope that aRepublican White House would make it easier to win approval for bigtransactions, said Jeffrey Silva, a Washington-based policy analystwith Medley Global Advisors.

Deutsche Boerse AG and NYSE Euronext this week delayed thedeadline for completing their merger until March 31 as the exchangeoperators try to persuade European Union regulators to approve thedeal. While the U.S. cleared the combination, the EU has told thecompanies that concessions they offered to allay antitrust concernsdon't go far enough, two people familiar with the talks said thismonth.

Dealmaking involving European companies rose 2.2 percent thisyear, bolstered by the first half. For the fourth quarter,announced volume sank 14 percent from the previous three months to$161.4 billion. Valuations have also dropped, making the MSCIEurope Index even cheaper than the MSCI World Index at 10.8 timesearnings. That may create opportunities for buyers from nationssuch as China.

“Chinese companies have been very successful at buying naturalresources in emerging markets, and they are now very supportive ofbuying industrial assets in Europe,” said Thierry d'Argent, globalhead of M&A at Societe Generale SA in Paris.

Asia Pacific

French dairy-product maker Yoplait and the aviation unit ofRoyal Bank of Scotland Group Plc both attracted interest fromChinese bidders this year, according to people with knowledge ofthose negotiations.

The value of acquisitions involving Asia Pacific companies rose3.8 percent to $698.4 billion this year, according to Bloombergdata. The biggest deal was Nippon Steel Corp.'s proposed takeoverof Sumitomo Metal Industries for about $22 billion, including debt.That was followed by BHP Billiton Ltd.'s purchase of Houston-basedoil and gas explorer Petrohawk Energy Corp.

Foreign buyers also spent more on Asia Pacific in 2011 than anyyear since 2007, according to the data. The largest overseas bidwas SABMiller Plc's $10 billion takeover of Australian beer makerFosters Group Ltd., the data show. Among Asian countries, Japanovertook China as the biggest acquirer of foreign assets for thefirst time since 2008 after the March 11 earthquake spurredcompanies to retrench.

Japan's Takeovers

“Japanese industries had been shrinking, and companies neededgrowth drivers,” said Kenji Fujita, head of M&A advisory atMitsubishi UFJ Morgan Stanley Securities Co., the Tokyo-basedinvestment banking venture of Morgan Stanley and Mitsubishi UFJFinancial Group Inc. “The earthquake raised the urgency forthat.”

Japan's Kirin Holdings Co. bought Brazilian beermakerSchincariol Participacoes e Representacoes, and China PetrochemicalCorp., or Sinopec, agreed to purchase a 30 percent stake in GalpEnergia SGPS SA's Brazilian unit.

Still, after a record-high volume of $161 billion in 2010, thevolume of announced deals involving Brazilian companies tumbled to$98.3 billion this year as the Brazilian real strengthened whilethe country's economy slowed.

“I'm glad to leave 2011 behind,” said Flavio Tavares Valadao,head of corporate finance at Banco Santander do Brasil SA, based inSao Paulo. “Deals are difficult to make and companies are worriedfor the future.”

Brazilian Deals

Santander worked on Telefonica SA's merger of its Brazilianfixed line unit, Telecomunicacoes de Sao Paulo SA's with its mobileunit, Vivo Participacoes SA. The Spanish bank also advised Spain'sIberdrola SA on the acquisition of Brazil's Elektro Eletricidade& Servicos SA for 1.77 billion euros ($2.3 billion).

Dealmakers predict that technology, industrials, naturalresources and health care will continue to be the sectors mostactively consolidating, especially if European policy makers canprevent financial turmoil from spreading to more countries.

“Companies need to have more confidence that we aren't going tohave a break-up of the euro,” said Mark Shafir, global head ofM&A at Citigroup Inc. “If you got that cleared up, then thefirst half of next year could be a lot better than the second halfof 2011 has been.”

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