* Worldwide M&A drops 44 pct in Q4, down 31 pct in 2008
* Goldman Sachs is top adviser globally
* Private equity nearly absent from deal activity
* Record number of M&A deals withdrawn
By Jessica Hall
PHILADELPHIA, Dec 22 (Reuters) - Global merger volume dropped by almost a third in 2008, ending five years of deal growth as a lack of available credit, plunging stock markets and a worldwide financial crisis undermined companies' ability to make acquisitions.
Global merger volume totalled $2.89 trillion, marking the lowest annual volume since 2005, based on preliminary data from Thomson Reuters.
In perhaps the most dramatic sign of how troubled the M&A market was this year, a record number of previously agreed deals -- over 1,100 -- were cancelled.
"The thing about the last 12 weeks ... the world has completely changed," said Howard Lanser, director of mergers and acquisitions at investment bank Robert W. Baird.
In the fourth quarter, merger volume plunged 44 percent, making it the lowest quarterly volume since the third quarter of 2004, Thomson Reuters data showed.
Among the deals to collapse this quarter was the largest-ever leverage buyout as BCE Inc (BCE.TO) (BCE.N) failed to pass a solvency test and a $28.3 billion purchase by a group of private equity firms fell apart.
Mining company BHP Billiton (BLT.L) (BHP.AX) scrapped its $66 billion takeover for rival Rio Tinto (RIO.AX) (RIO.L) in November, while Huntsman Corp (HUN.N) terminated its $6.5 billion deal to be bought by Apollo Management's Hexion Specialty Chemicals Inc.
A year that saw two U.S. investment banks collapse and two forced to convert into bank holding companies to survive, also saw upheaval in the M&A rankings.
(For a FACTBOX on bank rankings, click [ID:nHKG168243])
Goldman Sachs Group Inc (GS.N) maintained the top spot among global advisers and in the U.S., but JP Morgan Chase & Co (JPM.N) clinched a surprise No.1 spot in Europe due to its involvement in mega-deals such as InBev NV's INTB.BR purchase of Anheuser-Busch Cos Inc (BUD.N).
Goldman Sachs's key rival, Morgan Stanley (MS.N), was ranked fifth globally, down from No.2 a year ago. The firm ranked only eighth among U.S. advisers and seventh in Europe, according to Thomson Reuters.
Deal volume fell in most major regions in 2008, with only China and Brazil showing gains -- of 25 percent and 93 percent, respectively.
U.S. volume for 2008 plunged 38 percent from a year ago, while fourth-quarter volume slumped 55 percent. In Europe, 2008 volume dropped 29 percent, and Asia Pacific's annual volume fell 12 percent.
In an otherwise stormy climate, one bright spot was hostile deal activity, with the U.S. seeing the most unsolicited bids since 1999.
Unsolicited deals, in which one company makes an uninvited takeover bid for another, included InBev's $60.4 billion acquisition of U.S. brewer Anheuser-Busch.
(For FACTBOX on 2008's biggest deals, click [ID:nHKG300351])
Some hostile bids failed, such as Microsoft Corp's (MSFT.O) bid for Yahoo Inc YHOO.O, while Samsung Electronics Co Ltd (005930.KS) walked away from its $5.9 billion unsolicited bid for flash-memory card maker SanDisk Corp SNDK.O.
Still, unfriendly offers will likely continue into 2009 as companies with cash on their balance sheets, such as drugs firms, industrial conglomerates and utilities try to take advantage of the fall in stock prices, investment bankers said.
Hostile deals "may have a higher success rate if you believe that some white knights might not be able to participate, so there are fewer players out there who can bid," said James Morphy, a partner with law firm Sullivan & Cromwell in New York.
"If the (stock) market starts to move up, that will only accelerate hostile activity because people will feel 'I have to act now or never,'" Morphy said.
Private equity firms, which had been a formidable force in M&A in the prior two years, hit a five-year low in dealmaking in 2008, according to Thomson Reuters data.
Deals by private equity and other financial sponsors plunged 72 percent, with fourth-quarter deal volume at the slowest since the fourth quarter of 2001, Thomson Reuters data showed.
The outlook for the first half of 2009 is equally cold.
"Our estimation is for a weaker first two quarters, with some rebounding in the second half of the year. Overall, we estimate about $2 trillion in announced transactions, or down about 30 percent from 2008," said Paul Parker, Chairman and Head of Global M&A at Barclays Capital.
Cuts in interest rates, billions of dollars in industry rescue packages and trillions more in stimulus packages show efforts by governments to stabilize markets.
Yet, more time must pass before companies feel comfortable to do deals, experts said.
"Deals can be done in high or low market conditions, but volatile markets make it difficult to price and execute deals," Morphy said.
Those companies that may be acquisitive in 2009 will be the ones with enough cash and stable stock prices to fund their own deals, bankers said.
"Cash is king. What is really going to drive the market is corporations with strong balance sheets," said Steve Krouskos, Partner, Americas Accounts & Growth Leader, with Ernst & Young's Transaction Advisory Services group.
Krouskos said Fortune 1000 companies had about $1.4 trillion in cash, which could be put to good use for acquisitions.
Baird's Lanser said history shows that the best returns come from buying during down markets. "You don't make money buying at the top of the market," he said.
"If you're a corporate with a good cash position, 2009 is a good time to fill strategic holes or take advantage of the drop in equity prices," Krouskos said.
"A recession is a terrible thing to waste." (Additional reporting by Michael Erman; Editing by Lincoln Feast) (For more M&A news and our DealZone blog, go to here)