TMT is heating up. Vodafone, the British mobile phone operator, is pondering a bid for T-Mobile UK, while Microsoft has hired Morgan Stanley to sell its digital agency Razorfish. Both stories are in the Financial Times. Private equity group Candover says it has ended talks with potential acquirers, confident it can meet debt covenants. For all Reuters Deals news, click here.

And here’s what other media are writing today.

* Anglo American (AAL.L) is building its defences against a 41 billion pound ($67.74 billion) merger approach from Xstrata (XTA.L) by plotting talks about a major Chinese investment, the Sunday Telegraph reported.

* Switzerland’s UBS (UBSN.VX) is to pay 3 to 5 billion Swiss francs ($2.77-$4.62 billion) in the next two weeks to settle a U.S. tax probe into the bank, Swiss newspaper Sonntag reported on Sunday.

* China National Offshore Oil Corp (CNOOC) (0883.HK) and Petrochina are planning bids for a stake in Canadian oil firm InterOil Corp’s (IOC.N) natural gas project that could be worth up to $500 million, the South China Morning Post reported on Monday.

* The potential buyer of General Motors Corp’s (GMGMQ.PK) Hummer division will begin formal talks with Chinese regulators on Monday in an effort to win approval for its acquisition, The Wall Street Journal said on Saturday.

* British train and bus operator National Express Group Plc <NEX.L> has rejected an unsolicited takeover bid from rival FirstGroup Plc <FGP.L>, the Financial Times reported on Monday, without citing sources.

As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?

This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.

The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.

But these banks are raising money at a time when investors are betting on a recovery. The S&P 500 posted its highest close in seven months on Monday, as reassuring economic data reinforced hopes that demand will stabilize. The Dow climbed to its highest finish since January.

The stress-tested banks have already been tested for their ability to deal with a steeper downturn. So what does their ability to raise capital in this market really prove?

A week ago, when the Fed and Treasury mesmerized the financial world with the results of “stress tests” and capital-raising targets for banks, nobody spent much time asking “what if they can’t raise the money?” There was a sense that authorities had washed away enough uncertainty in the sector to satisfy investors. In short order, healthier institutions started raising capital. Those that didn’t need any stepped up efforts to rid themselves of onerous state support.

Bank of America shares are on a tear after the bank raised nearly $13.5 billion through a stock sale. Along with money it raised by selling part of its stake in China Construction Bank, this put Bank of America about half way to filling its stress-test gap.

But when Regions Financial, a large U.S. Southeast regional bank that was stress-tested, announced plans this morning to raise $1.25 billion through stock offerings — also about half of what federal regulators told it to raise — investors balked, sending its stock down more than 8 percent.

Just goes to show that not everybody can fail a stress test and impress shareholders with massive ownership dilution. Regions’ trouble may be that aside from selling stock, it has far less to offer than bigger banks in terms of asset sales to make shareholders feel better about doubling down. If nothing else, the market reaction could put a scent in the air that might interest an acquisition-minded lender needing exposure in the U.S. Southeast. If such a creature exists, it might find many more stressed-out lambs in the U.S. financial pasture.

News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.

Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?

A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.

Investors have welcomed the prospective £3bn (US$4.4 billion) sale of iShares by Barclays, which gives strong hope that the bank can avoid accepting a UK Government bailout and its implicit restrictions.

Since the deal announcement, Barclays’ shares have risen by 26 percent to 198.8p, their highest point since October, when a rescue £7.3bn financing was arranged with royal potentates from Qatar and Abu Dhabi. These Gulf investors agreed to subscribe for an effective 31percent stake through separate issues at 153.3p and 197.8p. Now, both slugs are “in the money”. However, that cash has not come cheaply.

The £4.3 billion of mandatorily convertible notes, which must be converted into shares at 153.3p by the end of June, receive a 9.75 percent coupon. And the £3 billion of reserve capital instruments pay 14 percent annually, or £420 million, for 10 years. They have warrants convertible at 197.8p.

The iShares proceeds could neatly pay off the holders of the reserve capital instruments. Removing that shackle is the aim of chief executive John Varley, and Barclays Capital boss Bob Diamond in particular. Then dividends could flow freely again. Diamond’s other goal is to make Barclays Capital an investment bank to challenge the few remaining serious players with global scope, such as JP Morgan, Goldman Sachs, Morgan Stanley, Deutsche and the Swiss banks.

The purchase of Lehman’s US advisory business, together with heavy recruitment across the Middle East and Asia, are helping Barclays catch up. But Goldman is extending its lead, after Monday’s strong first-quarter results and $5 billion share sale plans. The money Goldman raises will help pay back US Government funds. Barclays wants to pay off its Gulf rescuers too. However, the iShares sale will only add £1.5 billion net to Barclays balance sheet, bearing in mind iShares’ £1.5 billion book value.

So to pay off the reserve capital instruments and keep Tier 1 capital above the expected 7.2 percent, a higher bid needs to be found. The novel “go-shop” deal structure gives Varley and Diamond until June 18 to solicit such offers. However, a higher bid is unlikely. CVC has offered a generous 10 times historic EBITDA and Barclays is already putting up debt worth 70 percent of the sale price.

Selling all of Barclays Global Investors is an alternative. That could raise £6.73 billion on the same valuation as CVC’s offer for iShares, the smaller but higher margin part of the business.

Reporting by Chris Spink, from Acquisitions Monthly

(PHOTO: A video grab image shows Chief Executive Officer (CEO) of Barclays, John Varley, speaking to the House of Lords Economic Affairs Committee in London March 17, 2009.  REUTERS/Parbul TV via Reuters TV)

Morgan Stanley’s jump from 10th to first in our M&A league table should put them on cloud nine. The first quarter was busy with drug deals, and Morgan Stanley was in on the biggies: advising Wyeth on its $64.5 billion acquisition by Pfizer, and Schering Plough on its $46 billion takeover by Merck. And with the ink still to arrive on the paper of both deals, more good stuff could be on the horizon. The trick for Morgan Stanley, and anyone wanting to take down the king of the hill, is to spot and exploit the trend.

If drug deals remain du jour — and many expect the sector to stay hot, despite all the swallowing going on — the trend will certainly be toward Biotech. The markets for biologics and pipeline-filling cancer treatments have been strong in the face of expected government action to lower doctor and drug bills.

The heightened merger activity in Big Pharma has switched the tables a bit in the sector. After Roche’s nearly $47 billion acquisition of Genentech, analysts became increasingly convinced that the remaining big biotechs like Celgene, Gilead, Genzyme, Biogen Idec and Amgen could emerge as buyers, given that traditional Big Pharma is either digesting deals or just not so big anymore.

Christopher Kaufman; DealZone Editor

Deals of the Day:

* Drug maker Lupin Ltd said it has acquired a 51 percent stake in Multicare Pharmaceuticals Philippines Inc, marking the Indian firm’s foray into the $2.5 billion Philippines pharmaceuticals market.

* Britain-based dairy products maker Dairy Crest said it had sold its 49 percent stake in Yoplait Dairy Crest (YDC) to the Yoplait Group for 63.5 million pounds ($92.66 million) and that it would use the cash to reduce debts.

* Austrian steelmaker Voestalpine said its North American unit, VAE Nortrak had acquired U.S-based Leading Enterprises Inc, a supplier of speciality components for railway tracks, as part of a plan by the company to expand its railway division.

(PHOTO: A sign is pictured on Wall St. near the New York Stock Exchange in New York November 25, 2008. REUTERS/Lucas Jackson )

Preliminary first-quarter data from Thomson Reuters on mergers and acquisitions (M&A) and capital markets are out. And unsurprisingly, spring has not sprung in investment banking, with the big exception of a record deluge of corporate bonds.

Fees across investment banking (M&A, loans, and debt and equity capital markets) halved, while fees for completed M&A topped that with a 68 percent fall. Overall announced M&A fell by a third, compared to the same period last year, to $444 billion.

And even that figure is flattered by two huge pharma deals, which bankers doubt will be followed by more of the same, and a flurry of bank bailouts.

Still, some houses will find reasons to be cheerful — Morgan Stanley, for example, which is no. 1 globally and in the United States, up from a dismal 10th a year earlier.

You can see a full round-down of previous quarters (and eventually of this quarter) here.

Remember early last year and the year before, when the U.S. financial system won huge investments from Asian sovereign wealth funds? Those investments seemed so rich at the time, offering conversions into shares at deep discounts and the kind of interest rates banks had demanded from subprime borrowers. The biggest fear anyone on Wall Street had was some vague sense that foreign ownership of U.S. financial institutions might be somehow un-American or a threat to national security.

Nobody talks about those days much anymore. Merrill Lynch, the recipient of billions of expensive sovereign wealth fund support, was swallowed up by Bank of America. Talk of nationalization swirls around Citigroup, another sovereign wealth fund investment target throughout the stunning collapse in its share price.

Our correspondent George Chen reports China’s $200 billion sovereign wealth fund, China Investment Corp, is shifting to natural resources, fixed income and real estate after taking big haircuts on the U.S. financial sector. The fund, headed by former Vice Finance Minister Lou Jiwei, “has drawn criticism at home over large paper losses on its combined $8.6 billion investments in U.S. private equity giant Blackstone Group and Wall Street bank Morgan Stanley,” Chen says, citing people familiar with the matter.

Sources of sovereign wealth from Singapore, Abu Dhabi and South Korea have all been burned by bad bets on a recovery in the U.S. finance sector.

Lou is in Washington and New York this week and is scheduled to meet top executives of Wall Street firms including Blackstone, Morgan Stanley and Carlyle Group, all of which are keen to attract CIC investments. But Chinese government and financial sources familiar with Lou’s thinking tell Chen that chances of fresh bailout investments are slim, at least for 2009.

Other Deals News

* Thai broker BFIT Securities said it received a merger proposal from a Thai unit of Singapore’s UOB Kay Hian Holdings.

* Swiss drugmaker Roche sold a record $16 billion in debt to help finance a $42 billion hostile offer for Genentech, drawing strong demand from investors hungry for high-quality bonds.

* Spanish construction and energy group Acciona is still in talks with Enel over the sale of its 25 percent stake in Endesa to the Italian utility, an Acciona spokesman said.

* South Korea’s No. 2 beer maker Oriental Brewery has drawn interest from Japan’s Asahi Breweries and Kirin Holdings and local firm Lotte Group, in a deal worth about $700 million, a newspaper reported.

* Malaysian financial group BIMB Holdings is not in talks to merge its sharia banking subsidiary Bank Islam with Maybank, BIMB said.

* Brazil’s central bank said it approved a planned merger between Itau, one of the country’s largest private banks, and smaller rival Unibanco.

(PHOTO: Luo Jiwei, then China’s Vice Minister, Ministry of Finance, poses for a group photo at the 10th Asia-Pacific Economic Cooperation (APEC) finance ministers forum in Phuket, Thailand on September 5, 2003. REUTERS/Adrees Latif)

(Updated with references from Paul Kanjorski’s office)

Lined up to pay their dues, Wall Street CEOs met their congressional inquisitors on Capitol Hill, sparking bouts of righteous indignation peppered with cringe moments worthy of The Office.

Pennsylvania Democrat Paul Kanjorski implored the posterboys for an era of high finance gone bad to “please find a way to return that money before you leave town,” referring to hundreds of billions of dollars in taxpayer bailout funds that officials believe were poured into unwarranted bonus payments instead of being used to revive the business of lending to America. At least he said please.

The message was clear. Though they may never have been instructed to lend the funds when they got them, that’s what Congress wanted. Bankers need to get back to the business of lending. That’s what they were being bailed out for. Never mind that the business of lending, conducted with adequate credit checks, was not what they were doing before, and that prudence in a period of high inflation would preclude much new lending today.

Kanjorski, chairman of the House subcommittee on capital markets and insurance, is himself the subject of a telling tale of befuddlement making its way around the Internet. In an interview on C-Span he said money market investors pulled $550 billion from their accounts, prompting the Fed to step in on Sept 15 and stop the panic by closing money market accounts. His estimation was that “$5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed.”

It looks increasingly like he didn’t have all his facts in presentable, working order. Felix Salmon of Portfolio.com says he can’t find any reporting of money market funds being closed by the government, and neither can we. Andrew Leonard at Slate.com also questions the numbers. Kajorski’s office pointed us to a September New York Post article citing traders as saying money markets were pushed to the wall with $500 billion in sell orders, about a fifth of the entire market, and comments the congressman made at a hearing with then Treasury Secretary Henry Paulson, apparently referencing this report.

Keeping in mind that Paulson was just one of a long list of Goldman Sachs grads to become a top policy maker it’s not terribly surprising that neither the rocket scientists of Wall Street nor angry congressional committees seem well suited to the job of restoring confidence in the financial sector.

Other Deals News:

* Chinese state-owned aluminum group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts, but also raise regulatory scrutiny.

* Rio Tinto Ltd/Plc will sell nearly half its stake in the world’s biggest copper mine, nearly a third of its share in a major bauxite mine and sizeable stakes in key operations in Australia, Indonesia and the Americas in a $12.3 billion asset deal announced on Thursday.

* Spanish competition authority CNC has approved Gas Natural’s 16.7 billion euro ($21.58 billion) bid for Union Fenosa with conditions, a spokeswoman for the regulator said on Thursday.

* General Motors has been in talks with China’s SAIC Motor about the possible sale of a share of GM’s stake in their joint venture or other assets as the U.S. automaker races to raise cash, two sources familiar with the discussions said.

* Japanese video games maker Square Enix has agreed to buy the British firm behind titles such as “Tomb Raider” and “Championship Manager” for 84.3 million pounds ($120.8 million) to extend its reach in Europe.

* Satyam Computer Services Ltd’s board expects to outline the bidding process for a possible sale of the fraud-hit firm in the next 10 days time, Chairman Kiran Karnik said on Thursday.

* Thailand’s Bank of Ayudhya (BAY) said on Thursday it was in talks with financial institutions to buy more retail banking businesses following last week’s acquisitions from AIG.

* German retail and tourism group Arcandor is not in talks with Wal-Mart, the world’s biggest retailer, Thomas Middelhoff said on Thursday, pouring cold water on earlier market talk.

(PHOTO: Combination photograph of Wall Street bank executives testifying before House Financial Services Committee on Capitol Hill in Washington, February 11, 2009. Top row (L-R), are: Bank of New York’s Robert Kelly, JPMorgan Chase’s Jamie Dimon, Goldman Sachs’ Lloyd Blankfein and Wells Fargo’s John Stumpf. Bottom row (L-R), are: CitiGroup’s Vikram Pandit, Morgan Stanley’s John Mack, Bank of America’s Ken Lewis and State Street’s Ronald Logue.  REUTERS/Larry Downing)

It is amazing how the prospects of a grilling in Washington can make Wall Street’s CEOs behave. Until a little while ago, these were the masters of the masters of the universe. An elite group of highly paid stars who rarely showed signs of vulnerability, who rarely seemed to doubt their place at the top of the heap. But take a look at the testimonies they have prepared for today’s hearing at the House Committee on Financial Services and it looks like they have begun to embrace the new era, the new religion.

You would be forgiven in thinking they had all also hired the same speechwriter. They mostly stress they are prudent, frugal, humble, though not quite yet apologetic — it will be interesting if that changes once the grilling begins. Here are some of the themes:

Public anger towards Wall Street is justifiable:
“It is abundantly clear that we are here amidst broad public anger at our industry. In my 26 years at Goldman Sachs, I have never seen a wider gulf between the financial services industry and the public. Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.” — Lloyd Blankfein, CEO of Goldman Sachs Group.

“I know the American people are outraged about some compensation practices on Wall Street. I can understand why.” — John Mack, CEO of Morgan Stanley.

Bailout money from the government is not being used to reward bankers or executives (though they don’t quite explain how this is achieved):
“We have not used any of the government investment for dividends, bonuses or compensation of any kind — nor will we.” –John Stumpf, CEO of Wells Fargo.

“We have NOT used it to pay compensation — nor did we use it to pay any dividends or lobbying costs.” — John Mack, CEO of Morgan Stanley.

The government bailout money is being used for lending:

“We are still lending, and we are lending far more because of the TARP program.” — Kenneth Lewis, CEO of Bank of America.

There is a need for increased regulation, particularly of systemic threats:
“We need fundamentally improved systemic regulation.” –John Mack, CEO of Morgan Stanley.

“…in my view, long-term recovery will elude the financial industry unless we modernize our financial regulatory system and address the regulatory weaknesses that recent events have uncovered.” — Jamie Dimon, CEO of JPMorgan Chase & Co.

Greater transparency in the markets is desirable:
“We need greater transparency in our financial markets both for investors and regulators.” –John Mack, CEO of Morgan Stanley.

The government should be paid back as soon as possible:
“When conditions allow and with the support of our regulators and the Treasury, we look forward to
paying back the government’s investment so that money can be used elsewhere to support our economy.” — Lloyd Blankfein, CEO of Goldman Sachs Group.

“It’s our goal and our desire to repay the taxpayers in full as soon as possible.” — John Mack, CEO of Morgan Stanley

The previous ways of doing things don’t apply anymore:
“We understand that the old model no longer works and the old rules no longer apply.” — Vikram Pandit, CEO of Citigroup.

There are many efforts to keep defaulting homeowners in their homes:
“In the last year, we have kept approximately four out of five distressed borrowers whose mortgages we service in their homes. We have extended our foreclosure moratorium to help millions of other eligible homeowners whose mortgages we service.” — Vikram Pandit, CEO of Citigroup.

They are doing everything they can to restore confidence in the banking system:
“We are absolutely committed to doing our part — and working closely with the Congress, our regulators and our clients — to get the economy solidly back on its feet.” — Robert Kelly, CEO of The Bank of New York Mellon.

“I am pleased to be here today to assure the Committee that we at JPMorgan Chase are doing everything we can to help restore confidence in the U.S. financial system.” — Jamie Dimon, CEO of JPMorgan Chase & Co.

They are responsible and prudent:
“We do business and lend money the old-fashioned way — responsibly and prudently.” — John Stumpf, CEO of Wells Fargo.

They embrace frugality and humility:
“We are frugal. Last year, our overall corporate expenses actually declined one percent while our revenue rose over seven percent.” — John Stumpf, CEO of Wells Fargo.

“The real issue, I believe, is this: taxpayers feel, and rightly so, that if a bank is having sufficient trouble to require public support, all its financial decisions should signal a conservative, sober and frugal approach to the financial health of the company.” — Kenneth Lewis, CEO of Bank of America.

“The financial services industry is undergoing wrenching change. One thing we know is that we will be a smaller industry. And that’s not a bad thing. Obviously, the rapid growth of our industry in recent years was overdone. Now is a good time to remind ourselves that we play a supporting role in the economy — not a lead role. Our job is to help the real creators of economic value — people who make things, and people who use them — get together and do business. We bankers should find some humility in that.” — Kenneth Lewis, CEO of Bank of America.

(PHOTO: Chairman of the House Financial Services Committee Barney Frank (R) (D-MA) and ranking member Spencer Bachus (L) (R-AL) during questioning of  Chairman of the Federal Reserve Ben Bernanke during a hearing on Capitol Hill in Washington February 10, 2009.    REUTERS/Kevin Lamarque)