Although merger and acquisition (M&A) activity involving UK companies reached record levels in the second quarter, analysts see the global credit crunch dramatically slowing activity levels.

Spending by foreign firms on acquisitions in the UK reached £49 billion between April and June 2007, compared with £77.7 billion for the whole of 2006, according to data from the Office for National Statistics. UK companies splashed out £16.9 billion on overseas takeovers in comparison with £5.9 billion for the same period last year.

Major deals in the UK included the purchase of Alliance Boots for £11.1 billion by a consortium including private equity outfit Kohlberg Kravis Roberts, as well as Japan Tobacco’s £7.5 billion acquisition of cigarette-maker Gallaher. Major overseas deals in the period included AstraZeneca’s acquisition of Medimmune for £7.8 billion.

However, there has been little M&A activity since sources of capital dried up following the global credit crunch (prompted by the US sub-prime crisis), making the financing of new deals more difficult.

Keith Bowman, equities analyst at Hargreaves Lansdown, says, ‘You would have to say that the market will expect a slowdown in M&A going forward and we may see some reflection of this in investment bank profits.’ Deal volumes in the third and fourth quarters of this year should be much quieter, with more expensive borrowing costs and uncertainty over credit conditions making it more difficult to raise money.