A flurry of megadeals early in the year failed to translate into a sustained recovery in mergers and acquisitions, after the momentum was stymied by skittish central banks and geopolitical unease.

The value of deals globally stands at roughly US$1.4 trillion at the halfway stage, according to data compiled by Bloomberg. While that’s up 14 per cent on the same period in 2023, it still lags the 10-year average for a first half by more than $300 billion, the data show.

“The year has been good so far, but all indications suggest it should have been great,” said Eric Rutkoske, global head of M&A at Guggenheim Securities. “There has been a deceleration and that’s been a little bit surprising because most of the macro indicators actually got better throughout the year.”

The first quarter brought a whirl of megadeals and expectations that central banks would begin cutting interest rates after their most aggressive hiking cycle in more than a decade. But bankers got a reality check when that didn’t happen. In June, the U.S. Federal Reserve projected just a single rate reduction this year as it patiently manages its inflation objective. 

“The jury’s still out on whether rate cuts will start this year,” said Ben Carpenter, co-head of North America M&A at JPMorgan Chase & Co. “It’s really wait-and-see mode until we understand what direction of travel we’re in and what that means for the broader economy. That’s what’s keeping some folks on the sidelines.”

Higher borrowing costs and rising stock markets have continued to impede negotiations as companies struggle to agree on valuations, bankers said.

“Buyer and seller valuation mismatches have narrowed but they haven’t been completely bridged, and while capital is increasingly available, it’s still very expensive,” said Naveen Nataraj, senior managing director and co-head of U.S. investment banking at Evercore Inc.

Private equity firms have especially struggled to make the math work on deals in the higher-for-longer rates environment, after years of using cheap debt to fuel buyouts. While they have been returning to the fold, they’ve been doing so at levels that are below average for the last 10 years.

Strategic buyers find themselves with a “real advantage in the current market,” according to Gayle Turk, a partner at Centerview Partners in New York. “Many strategics want to use this advantage offensively to drive growth versus defensively to protect against downside.”

The largest deals of the year remain credit-card issuer Capital One Financial Corp.’s proposed takeover of rival Discover Financial Services and chip designer Synopsys Inc.’s agreement to buy software developer of Ansys Inc., which were both struck in the first quarter at around $35 billion each.

Notable M&A since the beginning of April includes Johnson & Johnson’s $13.1 billion pact to take over Shockwave Medical Inc. and ConocoPhillips’s agreement to acquire Marathon Oil Corp. for about $17 billion.

Hot spots

Energy has been one of the real hot spots for M&A. Deal values in the sector are up by more than 40 per cent this year, Bloomberg-compiled data show, on the back of transactions like Diamondback Energy Inc.’s $26 billion purchase of Permian driller Endeavor Energy Resources LP and ConocoPhillips-Marathon.

“In energy, the pace of deals and the rapidity with which one followed another – Hess, Diamondback, Chesapeake, ConocoPhillips, NuStar, to name a few — is pretty impressive,” said Andrew Nussbaum, co-chair of law firm Wachtell Lipton Rosen & Katz. “It would be hard to see a more active M&A market in that space than we’ve seen.”

Elsewhere, technology companies continue to be heavily targeted by both strategic and private equity buyers, but the pace of dealmaking in the health-care sector has come off the boil after a frenzied end to 2023, as drugmakers have turned their attention away from large public takeovers and toward smaller private transactions.

The typically quieter months of July and August are unlikely to see any acceleration in buying or selling, and Wall Street will return from the summer vacation just as the battle between U.S. President Joe Biden and Donald Trump for the White House enters its final stretch.

Bankers and lawyers said that some companies will wait for the outcome of the U.S. election in November before deciding whether or not to pursue headline-grabbing deals — particularly those in sectors sensitive to the kind of regulatory intervention that’s been a hallmark of the Biden administration.

“There’s a view that the regulatory policy could change meaningfully so there are a lot of larger transactions that companies may wish to start under a new administration,” said Rutkoske at Guggenheim.

The U.S. election is just one of a number of items on the agenda that could impact M&A decision makers in the second half. Geopolitics was cited as the biggest risk to markets and the global economy by clients of Goldman Sachs Group Inc. at the start of the year and since then the Israel-Hamas war has escalated and Russia’s conflict in Ukraine continues to weigh on sentiment.

“Management teams, boards and sponsors are all feeling a lot more confident but there is still some macro uncertainty,” Evercore’s Nataraj said. “Deals are still challenging to get done but they’re getting done.”