The £11 billion buyout of Alliance Boots said everything about the mergers and acquisitions environment in the run-up to the credit crunch. Over the previous four years, banks, private equity firms and companies had become increasingly ambitious in the scale of their deals. By early 2007, the M&A market was at fever pitch. The agreement the Stefano Pessina, Boots' chairman, and KKR, the private equity firm, forged with their funding banks was the culmination - for the first time in European M&A history, the banks put in more equity to pay for an acquisition than the acquirers themselves.

The fact that the terms of the deal allowed Mr Pessina to take half a billion pounds out of the company and still double his stake in Boots also raised eyebrows. The last explosion in M&A figures had been during the dotcom boom, when a catchy name and high revenue multiple was enough to secure a buyer. Last year the deals were all around household names, such as J Sainsbury, Cadbury Schweppes, Imperial Tobacco, Reuters, ABN Amro and, of course, Alliance Boots.

By early July, deals worth $2,300 billion had been signed, up 71 per cent on the previous year. Average deal premiums had rocketed to 49.5 per cent from 24.4 per cent. Private equity firms had raised $85 billion, which, with leverage, gave tham $500 billion or so to spend.

Such monster M&As were fuelled by the investment banks, who fell over each other to offer buyers more and more leverage, at ever-lower prices. The banks were able to do this because they then securitised the leveraged finance and sold it on to investors. But when the bottom fell out of the credit market, these investors disappeared.

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Banks were left with billions of dollars worth of highly-leveraged loans on their books. They, in turn, became increasingly reluctant to lend, and definitely not at the prices they had previously offered. The M&A gravy train ground to a halt. It was not until this May that the banks behind the Boots deal were able to offload any of the leveraged loans they provided to Mr Pessina and KKR, and were forced to take a 10 per cent haircut to do so.

Deal figures for the first half of the year showed how badly the M&A market had been hit by the credit crunch. According to Dealogic, the total value of deals done in the first half was $1,870 bilion, in the slowest start to a year since 2005. Private equity buyouts were worst affected, comprising just 7 per cent of total M&A volumes, down from 20 per cent in the first half of 2007.

The UK's deal market has been worst affected. Deal activity was down 60 per cent in the first half, compared to a global fall of 35 per cent, according to Thomson Reuters. The figures will jump in the second half because of the Rio Tinto-BHP Billiton merger but without that $188 billion deal, there is likely to be another fall in M&A figures for the next six months.

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