By: James B. Kelleher

December 24, 2005, Reuters

CHICAGO (Reuters) - The numbers are in and the verdict's been rendered: 2005 was the best year for U.S. deal-makers since 2000.

The factors contributing to that performance were sundry, from aggressive buying by private equity firms to accommodating capital markets to optimism in corporate boardrooms.

So what's in store for 2006? Investment bankers are quick to say their crystal balls are no clearer than anyone else's. But like most in the industry, James Glerum, a managing director of investment banking at UBS and co-head of the bank's Chicago office and Midwestern region, says he's optimistic.

"We continue to be encouraged by the high level of strategic dialogue among our industrial clients," Glerum says. "Many of our clients are actively considering acquisitions."

Steven Bernard, the director of M&A market analysis at Robert W. Baird & Co. Inc. in Chicago, agrees.

"Everything we saw in the beginning of 2005 is basically still in place as we approach 2006."

Reuters polled a dozen M&A practitioners and analysts here this week and asked them to tell us what trends they'll be keeping an eye on next year and why. Here are four that came up repeatedly.

FINANCIAL SPONSORS

Private equity firms were big players in 2005, helping drive both deal volume and prices. In the end, they accounted for $217.9 billion of the $1.1 trillion of deals announced in the United States this year, according to Dealogic. And there's every reason to believe they'll be a big factor in the marketplace in 2006.

"There remains a lot of liquidity in the marketplace, with plenty of private equity capital available," says John Spence, a managing director at Dresdner Kleinwort Wasserstein and head of its Chicago office.

The question is whether the firms will continue to push multiples higher still. Spence thinks not.

"For financial sponsor transactions, the average debt level is around six times debt to EBITDA. While each transaction has to be evaluated on its own merits, I don't believe the average can go much higher than that."

Steve Kaplan, an M&A watcher at the University of Chicago's Graduate School of Business, sees more activity from the private equity groups in 2006 - and a subsequent reckoning.

"They've got a lot of money and they'll put it to work and a lot of those deals will get into trouble down the road," he says. "Every time private equity's been at a peak, it rarely ends well."

FOREIGN BUYERS

The dollar value of deals involving foreign buyers and U.S. targets jumped 39 percent in 2005 to $132.5 billion, according to Dealogic - and that was even after one of the bigger bids, CNOOC's bid to buy Unocal, foundered on the political rocks.

Since the United States remains an attractive place to do business, it will continue to lure foreign companies. But some of the buying in 2005 was spurred by the dollar's weakness. If the greenback continues strengthen, the advisers say, foreigners may find it harder to close the deal.

INTEREST RATES

Despite rising interest rates and relatively high commodity prices, debt and equity markets were receptive to new issues in 2005. Glerum says he and his colleagues at UBS "don't see a material change in the new issue markets over the near term."

Interest rates may continue to rise, but as long as the increases are small and reflect the continued strength of the U.S. economy, it shouldn't slow the deal-making.

"It isn't a question of how high the rates are," says Bernard at Robert W. Baird & Co. Inc. "It's a question of whether the banks and non-bank banks are going to give you money. And they're still lending aggressively." Even so, if rates were to rise quickly, bankers say it could put pressure on highly leveraged deals done in 2004 and 2005.

ENERGY PRICES

The spike in energy prices that followed the hurricanes in the U.S. Gulf this year has moderated. But the surge's effects could continue to play out in the M&A space in 2006. The reason: many industrial companies, already reeling from the competition offered by rivals in China, saw their margins further squeezed.

"In some cases," says Bernard, "that may have been enough to push them over the edge into looking for buyers."

Who might buy them? Bigger, more competitive companies looking to leverage their overhead costs and reduce the impact of higher energy prices are the likely candidates.