The Pfizer (PFE) deal to buy Wyeth (WYE) for $68 billion looks like a single M&A deal which will break the drought in investment banking activity, but only for a day.

The conventional wisdom is that acquisitions in a recession are too risky. They require capital and integrating companies is hard even when the economy is strong. Pfizer will borrow $22 billion to consummate the transaction.

The reasons behind the Pfizer transaction apply to a broad cross section of industries and underscores why there is about to be a significant up-tick in M&A activity, one which could not have been expected just a month ago.

According to The New York Times, "The deal would not only create a pharmaceutical behemoth but would be a rarity in the current financial tumult: a big acquisition that is not a desperate merger of two banks orchestrated by the government."

Pfizer and Wyeth are facing a problem which is systemic and not isolated to their industry. Each expects revenue to fall in the near future as some of their largest-selling drugs lose patent protection. Putting the two companies together will allow them to fire tens of thousand of people and cut other overlapping costs. The firms are nearly identical, which makes expense savings certain.

A large number of other industries are facing similar problems. The retail industry is the most obvious. Beyond that, airlines are back in trouble. All of the merger plans that carriers were looking at last summer can be dusted off. Traffic is falling sharply as consumers and businesses cut back on travel. In a related sector, the hospitality industry is in it worst period in decades. Some hotels are nearly empty.

A merger of two of The Big Three is still on the table. The government may even force it as part of an aid package. Auto parts suppliers are in such bad sharp that some will go into Chapter 11 or outright liquidations before the middle of the year.

Two years ago, M&A activity was driven by easy capital and the notion that putting two related companies together could enhance revenue by selling a broad array of products and services to common customers. Many of those deals are in trouble now because of the leverage they took on to fund their transactions.

The next wave of M&A, which will almost certainly begin within the month, is one designed at helping troubled companies survive by pressing cost cuts through consolidation of common functions. It is an ugly set of motivations but compelling enough to insure that investment banks can call some of their best deal people and ask them to come back to work.

Douglas A. McIntyre

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