Mergers and acquisitions activity hit its lowest quarterly level in more than seven years in the first quarter of this year, but investment bankers said a run-up in the markets will help turn the tide.

Global volumes of announced M&A deals dropped to $416 billion in the first quarter of 2012 from $737 billion a year ago, according to preliminary Thomson Reuters data, as the euro zone's debt crisis and concerns over economic growth around the world took their toll.

JPMorgan Chase & Co rose to the top from the No.5 spot, knocking Goldman Sachs Group Inc down to second in the worldwide M&A advisory league tables, with Citigroup Inc up one spot to third.

Financial markets made a strong come back in the first quarter of this year and M&A professionals said deals would follow, pointing to a lead time between the improving financing conditions and the signing of deals.

"There's a growing view that the U.S. economy is strengthening and that the crisis in Europe has passed, although it will take a while to sort out," said Jonathan Rouner, Nomura Securities' (8604.T) head of M&A for the Americas.

World stocks measured by the MSCI All-Country World Index are up 11.4 percent year-to-date, benchmark 10-year U.S. treasuries yielded below 2 per cent for most of the first quarter, while central banks globally continued to flood the financial system with cheap money.

"As we move into this summer and fall, you should be seeing deal activity at a better level. There is just a general, better sense of confidence," said Steven Koch, vice chair and co-chair of Credit Suisse Group AG's M&A team.

GLOBAL SLUMP
Declines in M&A activity in every major region contributed to low global volumes in the first quarter of 2012, which slumped to their lowest since the third quarter of 2004.

U.S. M&A in the first three months of 2012 was down 60 percent from the same period in 2011, European M&A was down 33 per cent and Asia-Pacific M&A was down 42 per cent, demonstrating how deal flow even in fast-grow emerging markets is impacted by global economic uncertainty.

At $127 billion, M&A volumes in the United States came in lower in the first quarter than in debt-stricken Europe, which counted $137 billion in M&A activity.

"If you're on the board of a global company contemplating a large M&A transaction, you're going to be hesitant given the uncertainty outlook for the global economy, and the European economy in particular," Nomura's Rouner said.

Cross-border M&A totaled $152 billion in the first quarter of 2012, accounting for 37 per cent of worldwide deals, down from $237 billion in the first quarter of 2011, when it accounted for 32 per cent.

HUNT FOR RESOURCES
The materials, energy and power sectors together accounted for 38 per cent of global M&A volumes as companies sought to boost their footprint in their patch amid a commodities boom and rising energy prices.

With an enterprise value of $49 billion, the merger of commodities trader Glencore International Plc and mining group Xstrata Plc dominated the resources sector and accounted for more a tenth of the global volume.

"The simple fact is that globalization and growth in a variety of emerging economies have fueled the commodities markets for several years running now. We expect to continue to see meaningful activity in any commodity-based sector," said Credit Suisse's Koch.

Despite expectations that the capital needs of banks will lead to a wave of M&A opportunities, financials fared the worst, falling 71 per cent year-on-year, as financial institutions held back from selling at knock-down prices.

"Energy will continue to be active, and healthcare is going to become more active. By the second half, I think the M&A dynamic will be more widespread. I don't think it will be isolated to a particular sector," said Jim Woolery, co-head of North American M&A at JPMorgan.

PRIVATE EQUITY
Global private equity-backed M&A came in at $43.9 billion in the first quarter of 2012, down by a quarter year-on-year. Dealmakers expect volumes to rise as buyout firms take advantage of improved financial markets to exit investments as well as buy unloved businesses from companies reviewing their strategies.

"It takes a little while to get the pipeline going and then it starts moving through at some velocity. I think we could see a pretty good second half (of 2012)," said Jeff Bunder, global private equity head at Ernst & Young Transaction Advisory Services.

A large number of companies, including private equity portfolio firms, are also expected to tap the public markets.

Bankers predict a rise in activity during the second quarter as after-market performance remains strong and the VIX -- a gauge of stock market volatility -- hovers at five-year lows.

"This year, issuance was slow out of the box in January resulting in fewer IPOs than we would have normally seen. Now that the market is creeping up, we expect to see greater activity in the second quarter," said Frank Maturo, head of Americas Cash Equity Capital Markets at Bank of America Merrill Lynch.

The expected recovery in deals, however, could still be scuppered by a major geopolitical or macroeconomic event, such as a confrontation with Iran or soaring oil prices. But barring such shock to the markets, dealmakers are optimistic about 2012.

"What we felt at the beginning of the year was really a reflection of the low level we all saw in October. This air pocket in the M&A market was predicted and expected because of the pipeline effect around Europe," said JPMorgan's Woolery.

"(M&A activity) will build, but it's not going to turn in a dramatic way. That's just a function of the time it takes to put deals together," he said.