Merger mania likely to continue into 2007

By Dan Wilchins

NEW YORK (Reuters) - This year's mergers juggernaut is unlikely to slow until at least the middle of next year, bankers said, amid cheap borrowing costs, high stock prices and private equity firms swimming in cash.

At least seven big acquisitions or offers were announced on Thursday, including an $18.7 billion deal to take No. 1 U.S. radio company Clear Channel Communications Inc. (CCU.N: Quote, Profile, Research, Stock Buzz) private, pushing the value of announced mergers this year over $3.33 trillion, according to Dealogic.

"What we see suggests that 2007 is going to be a very, very good year," said Dennis Hersch, global mergers and acquisition chairman at JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research, Stock Buzz), at the Reuters Investment Banking Summit.

There are reasons to be skeptical of how long the current merger mania can last. Economic growth is slowing and longer-term borrowing costs may eventually rise.

But for now, merger bankers seem unconcerned, in part because record high stock market levels give companies strong currency for acquisitions. The Standard & Poor's 500 index .SPX closed at a six-year high on Thursday.

Meanwhile private equity firms, which have raised $350 billion this year by some estimates and have been behind some of the top deals, could fuel more than a trillion dollars of deals in coming years.

"If you pulled private equity out of the market, the whole investment banking business would be limping along," said Tony James, Blackstone Group president.

Another factor is the low cost of borrowing.

Though short-term interest rates have risen four percentage points since mid-2004 and a full percentage point this year, 10-year Treasury yields are just 0.26 percentage points higher than at the beginning of the year.

Even for risky borrowers rates are low, which has helped bring global junk bond issuance to over $220 billion so far this year, toppling the previous record of $211 billion in 2004.

Earlier this month, hospital operator HCA Inc. HCA.N sold $5.7 billion of junk bonds without a hitch.

"We issue an awful lot of debt, but we routinely do not take all the debt that creditors offer," Blackstone's James said.

A QUESTION OF CONFIDENCE

Another crucial factor driving mergers is chief executives' confidence, said Mark Davis, a managing director at Gleacher Partners.

"When chief executives are confident within their business' prospects, and the general economic landscape, they tend to think about how they can use their company's money to give a pop to shareholders," he said.  Continued...