The pace of mergers and acquisitions in the $3.1 trillion chemical industry slumped to the slowest since 2009 in the third quarter, quashing earlier predictions that the year may be a record.

The value of global chemical transactions announced in the three months through September fell 64 percent to $6.46 billion from the second quarter and slumped from $48.5 billion in the year-earlier period, according to data compiled by Bloomberg. That’s the lowest volume since the fourth quarter of 2009, the data show. The average transaction size fell 59 percent to $89 million from the preceding period.

Europe’s debt woes have led to a pause in multi-billion- dollar deals. BASF SE (BAS), which announced a $5 billion bid for Ciba the day Lehman Brothers collapsed in 2008 and paid $3.8 billion for Cognis last year, is focusing on debt reduction. The quarterly drop may be a blip as CEOs have more robust balance sheets and are still keen to do deals, said Ariel Levin, a partner at Valence Group. Asian companies are among those hunting for assets in the west, he said.

“The private equity and mega deals are going to be put out for a little bit,” said Levin. “CEOs feel much more confident that then they did during the 2008 crisis period.”

Morgan Stanley headed the advisers’ league table for the third quarter, working on three transactions for a total value of $2.31 billion, including the largest deal announced, Lonza Group AG (LONN)’s planned purchase of Arch Chemicals Inc. (ARJ) for $1.35 billion. JPMorgan Chase & Co. (JPM), which led in the first half, now holds the No. 3 spot for the first nine months, behind Credit Suisse Group AG and second place Morgan Stanley.

IPOs Delayed

An initial flurry of deals set the stage for a potential record this year. The tally in the first half approached the pace of the same period in 2007, when deals rose to a high of $131 billion for the full year. Among this year’s biggest transactions are Berkshire Hathaway Inc.’s purchase of Lubrizol Corp. (LZ), an engine additives maker, for about $9 billion. DuPont Co. acquired food-ingredients maker Danisco A/S for $7.1 billion in January.

A drop in equity markets, caused by concern that Europe is struggling to contain a debt crisis, is also weighing on sentiment among those companies seeking to go public. Evonik Industries AG, which had planned to carry out Germany’s biggest initial public offering in a decade by now, has delayed its share sale until markets improve. Refractory metals and chemicals maker HC Starck GmbH also shelved a planned IPO.

Thrifty Lanxess

CVC Capital Partners Ltd. has had to make a renewed push to sell its Belgian amine derivatives maker Taminco after failing to agree on a $1.3 billion deal with German specialty chemicals maker Lanxess AG (LXS), four people familiar with the situation said last month.

Lanxess has strict internal guidelines on finding takeover targets and is determined to maintain financial discipline and not overpay for assets, CEO Axel Heitmann said on Aug. 11.

“Transactions may have been thwarted but postponing is not walking away,” said Wolfgang Falter, a managing director overseeing chemical transactions at consultancy AlixPartners. “One can assume this is just deals being put off rather than a general structural shift in strategy.”

Deal flow is set to continue as there is pressure on companies to divest businesses in areas where they lack leadership positions and valuations of targets are also being dragged down by the market slump, said Levin, one of a group of former Bear Stearns investment bankers that went on to found Valence Group. Valence has advised on about 11 transactions in almost as many months.

Cash Pile

Saudi Basic Industries Corp. (SABIC) is among those hunting for assets, as are European chemical companies Royal DSM NV, Lanxess and Symrise AG. (SY1) TFL Holding GmbH, a German maker of chemicals for the leather industry, hired Swiss investment bank Leonardo & Co. to find a buyer for the company that may be worth at least 200 million euros ($277 million), three people familiar with the situation said Sept. 9.

In Europe alone, chemical companies were sitting on about 29 billion euros in cash at the end of the second quarter, up from 16.5 billion euros two years earlier, Bloomberg data show.

“Very few CEOs that were considering acquisitions six months ago are showing less appetite now,” said Valence’s Levin. “CEOs feel much more confident that then they did during the 2008 crisis period. Heading into 2012 we’re bullish.”

Bloomberg