The total value of M&A fell to $732.82 billion in the second quarter of 2023 from $1.14 trillion in the second quarter of 2022, according to Dealogic data as of June 29, as high interest rates and a stand-off over the U.S. debt ceiling kept dealmakers on edge.

"Global uncertainty is what is impacting M&A most - it just makes people uncomfortable. It's easier to say, I'll pass on a deal - nobody gets fired for passing on a deal. But, we all talk about the deal that never should have happened," said Michael Aiello, chairman of the corporate department of law firm Weil, Gotshal & Manges LLP.

The quarterly tally was higher than the first quarter of 2023, when $601.32 billion in deals was announced, giving grounds for optimism to those who argue the recovery in the M&A market has started.

"We are bottoming out. In order for companies to continue to compete locally and globally they will have to grow organically, especially inorganically. We will see an increase in strategic activity," said Raymond McGuire, president of investment bank Lazard Ltd (LAZ.N).

M&A volumes in the United States declined by 30% to $318.4 billion, while Europe and Asia Pacific volumes shrank 49% and 24% respectively.

"People tend to look at just the previous year, but if you look at activity over a 10-year period or a 20-year period, we're in an M&A environment that's not red hot like it was in 2021, but it's by no means a moribund M&A market," said Steve Baronoff, chairman of global M&A at Bank of America (BAC.N).

Major transactions during the quarter included pipeline operator Magellan Midstream Partners' nearly $19 billion takeover of natural gas-focused ONEOK Inc (OKE.N), grain trader Bunge Ltd's (BG.N) $17.3 billion acquisition of rival Viterra Ltd, and Carrier Global Corp's (CARR.N) $13.2 billion deal for the climate solutions unit of Germany's Viessmann Group.

"More deals right now are starting more bilaterally and less as part of a broad process. In a lot of cases, what you're seeing is parties will begin to have discussions and then banks on the sell side will work with their client to kind of create a process around that lead bidder," said John Collins, global head of M&A at Morgan Stanley (MS.N).

The S&P 500 Index has risen 14.5% since the start of the year. Shares of companies that have lagged in the market recovery have sometimes become acquisition targets, especially when they have major shareholders that can take them private, dealmakers say.

"Over the next six months, there’ll be a lot of share buybacks and a lot of controlling shareholders proposing buyouts of their publicly listed subsidiaries – both are indicators of beliefs that markets will be stronger by this time next year, and neither typically require extraordinary financing," said Ethan Klingsberg, co-head of U.S. M&A at Freshfields Bruckhaus Deringer LLP.

Investment bankers and lawyers said the more challenging environment for leveraged buyouts made acquisitions difficult for private equity firms and contributed to the slump in activity.

So far this year, private equity-led buyout volumes have slumped 59% year-on-year to $196.66 billion.

"The private equity business won't be the same as before, but they must demonstrate that they are selling assets and investing. They have to adjust valuations and accept that the interest rate curve is what it is," said Manolo Falco, global co-Head of banking, capital markets & advisory at Citigroup Inc (C.N).

While the business of M&A was relatively insulated from the impact of the regional banking crisis, some advisors warned of potential ripple effects on broader availability of credit.

"Those regional banks fund some middle market M&A activity, but if there's less credit available to the middle market, or to commercial real estate, which is heavily financed by those, there might be a bit of a cascading effect on credit availability," Scott Miller, co-chair of Sullivan & Cromwell.

NO MEGA DEAL

The overall value of large deals declined by more than half from the same period last year. Not a single so-called mega-deal, which typically refers to transactions worth over $25 billion, was signed during the quarter.

"This is not the kind of precipitous meltdown that say 2008 was for example. You still have a solid amount of activity and it's down relative to extraordinarily high periods. There's still a bunch of work out there," said Howard Ellin, an M&A partner at Skadden, Arps, Slate, Meagher & Flom LLP.

Dwayne Lysaght, co-head of EMEA M&A at JPMorgan Chase, said large deals involving companies with a presence in several countries have become tougher to pull off due to heightened scrutiny from different groups of regulators across the world. Antitrust lawyers are being brought into M&A processes much earlier than before, he added.

During the quarter, the U.S. Federal Trade Commission (FTC) launched challenges to block announced deals including Amgen Inc's $27.8 billion deal to buy Horizon Therapeutics PLC (HZNP.O) and Illumina's (ILMN.O) acquisition of cancer diagnostic test maker Grail (GRAL.O).

"I have not seen increased traction on the truly gigantic deals the way we did a few years ago," said Eric Schiele, a senior M&A partner at law firm Kirkland & Ellis. "Eventually the industrial imperative to transact is going to outweigh the headwinds. And when it does, if history is any guide, it's going to do so pretty fast and pretty furiously."