Dealmakers are not known for their patience. Yet that's what's needed more than anything else a year after Lehman's collapse.

It takes months longer to close a deal, the number and size of transactions has shrunk, and mergers and acquisitions fees have plummeted. Much of the M&A work now is either advising failed companies on restructurings or organizing fire sales.

The nature of M&A has changed fundamentally, said Antonio Weiss, Lazard global head of M&A. On one end of the spectrum, there's an increase in volume of distressed activity and on the other, well-capitalized corporations have a chance to revisit acquisition ideas at lower values.

Transformational deals have been few and leveraged buyouts are just not there -- yet. But there are bright spots, such as this week's unsolicited bid by U.S. firm Kraft Foods Inc for the UK's Cadbury Plc, and confidence has started to return.

Many CEOs feel we've bottomed, said James Stynes, global chairman of M&A at Deutsche Bank. We are starting to see a pickup that could make 2010 more positive than people originally thought.

That's a sea change from last year.

There were certain points over the last year when it was ... so incomprehensible to go talk to a board about a deal, said one senior dealmaker who declined to be named. It was just not a topic that belonged in the board room.

CEOs had bigger fish to fry -- plummeting share prices, hard-to-get credit and ballooning inventories.

Last year was a very significant event that caused everyone to be very cautious, said Robert Kindler, global head of M&A at Morgan Stanley. The real focus that companies have had this year hasn't been M&A, but looking at their balance sheets.

The transformed deals landscape caused a musical chair dance in the all-important league tables or deal rankings. The four top banks so far this year are Morgan Stanley, Goldman Sachs? Citigroup and JPMorgan? the same four as in 2008 but in a different order.

BACK TO BASICS

Before the crisis hit, Wall Street was in product mode, said John Studzinski, global head of the advisory group at private equity firm Blackstone?

There was an M&A product, a convertible product, an equity product, a debt restructuring product, Studzinski said. Now ... we have gone back to the basics of the late '70s and early '80s -- balance sheet solutions, and that includes buying and selling businesses and debt restructuring.

That takes time: Boards want more time to check the books, assembling financing is a challenge and many CEOS prefer to use stock to do deals. Therefore, it can now take 9-15 months to close a deal, from 6-9 months pre-crisis, Studzinski said.

The M&A business is now book-ended by big deals and bankruptcies, said Paul Parker, head of global M&A at Barclays Capital. At the trough, there's an increase in involuntary M&A where companies are forced into transactions, he said, while that at this stage in the cycle it is typical to see companies with size and scale find a strategic imperative to do a deal despite the lack of visibility into future earnings.

The key is being able to adapt.

This is an industry that constantly adjusts and adapts and has to, said Roy Smith, professor at NYU Stern School of Business, and a former Goldman Sachs partner. We had what was a cataclysmic meltdown in the market .... But we went through it. The industry simply adapted.

LBO DEARTH

LBO deals are still absent because the cheap financing that greased the business is no longer there.

The big question ... is: 'Will private equity ever return?' said Gar Bason, global head of the M&A practice at law firm Davis Polk & Wardwell. The market won't really be back to normal until those participants ... return.

Junk bond spreads remain wide at some 900-plus basis points over U.S. Treasuries. Investment grade bond spreads are down to about 250 basis points, from more than 650 right after the Lehman collapse, but are above the historic average.

With the capital markets thawing there's an expectation that sponsors (private equity firms) will become more active, both in terms of making new investments and exits, said Stefan Selig, executive vice chairman of global corporate and investment banking at Bank of America. However, the lack of depth in the credit markets means it is unlikely that buyout firms will pursue very large going-private transactions, he added.

CONFIDENCE BOOST?

The lubricant for M&A -- confidence -- is coming back.

We're definitely seeing an increase in phone calls from bankers about potential deals, said Mario Ponce, a partner at law firm Simpson Thacher specializing in M&A. People are starting to pick up the pen again.

M&A deals so far this year total $1.3 trillion, down from year-to-date volumes of $2.1 trillion in 2008 and $3.2 trillion in 2007 -- and deals for troubled financial firms dominate.

M&A fees fell to $8.4 billion for the first half of 2009 from $18.6 billion the same year-ago period.

That's changing now. Aside from Kraft's overture, a recent bright spot was Walt Disney Co's $4 billion acquisition of Marvel Entertainment.

Private equity firms are also seeing opportunities to cashing in some chips or exit. Blackstone and Lion Capital are in talks to sell soft-drinks maker Orangina to Japan's Suntory, while Kohlberg Kravis Roberts & Co's portfolio company Dollar General has filed for an IPO.

Capital raisings are another hot spot. It started with secondary offerings because companies needed capital. Now initial public offerings have started to pop up -- after just one IPO in the five months after Lehman's collapse. Six are scheduled to price in the week of September 21, marking the busiest week for IPOs since December 2007, according to Thomson Reuters Research

Bankers aren't breaking out the champagne yet, though.

We're at a trough and we're likely to build slowly out of it, said Cary Kochman, co-head of Americas M&A at UBS. It took 7 years to build back from the last cycle downturn. The cycle times from trough to peak are not short.

(Additional reporting by Jessica Hall in Philadelphia, Mike Flaherty in Hong Kong, Mike Erman, Jui Chakravorty, Phil Wahba and Dan Burns in New York; Editing by Jack Reerink and Richard Chang)

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