Given the chaos in the financial economy, it should come as no surprise that M&A activity fell sharply in the fourth quarter of 2008. Since 1980, US recessions have led to steep declines in the value of global M&A activity—typically, of around 50 percent during the first year. That falloff results from factors we see in the current downturn as well, including lower deal values in sinking equity markets; difficulties with financing, particularly for very large transactions; and a general fear about the economic outlook, which forces acquirers to put plans on hold. Moreover, in December 2008 stock markets were down 40 to 50 percent from their January levels. Corporate earnings expectations have been substantially lower too, and access to funds is challenging, to say the least.

The current environment is grim, and nobody knows how the M&A market will develop in the short term. The last quarter saw a sharp drop in activity, and there is still considerable uncertainty about the ability of capital markets—particularly the debt markets—to provide enough financing to support deals. We believe that over the longer term, however, the trends that emerged over the past cycle will remain important. As a result, the pattern of...