Despite an increasingly uncertain economy and illiquid credit markets, merger and acquisition activity has been on the upswing since February, when global M&A volume dipped to $234 billion. Each month since then has seen an uptick in deals, with global volume hitting $455 billion in July, according to research firm Dealogic.

But M&A chiefs across Wall Street believe the momentum won't last. New signs of fragility among financial institutions and a volatile stock market are likely to put the kibosh on the continuing increase in dealmaking that marked the first half of the year.

"While the credit and equity capital markets continue to be challenging, my sense is that the M&A environment will remain active," says Boon Sim, Credit Suisse Group's head of M&A in the Americas. "However, I don't see M&A activity picking up from the second quarter for the rest of the year."

While July's M&A robustness -- global volume was up 11% from $410 billion in June -- could indicate that companies are shrugging off market volatility and credit uncertainty to keep dealmaking strong, Wall Streeters offer other possible explanations for the month's double-digit increase. Cary Kochman, head of Americas M&A at UBS, attributes the rise to the lumpiness of a few larger deals, including Roche Holding AG's $43.7 billion bid for Genentech Inc. and Dow Chemical Co.'s $18.8 billion offer for Rohm and Haas Co.

Jean Manas, Deutsche Bank Securities Inc.'s head of M&A for the Americas, says July also got a boost from June's less volatile equity markets. Now, bankers are anticipating a flattening of M&A activity in the historically quiet months ahead.

"Usually, August and September are slower. So expect a drop-off," says David Kirshenbaum, Citigroup Inc.'s chief operating officer of global M&A. "But we are cautiously optimistic for the rest of the year."

He has grounds for optimism, since even in the bleakest days of the credit crisis, deals were getting done, albeit at a much reduced rate. Manas is also somewhat sanguine regarding the rest of the year. "My expectation is there will continue to be activity," he says. "The Street will end up having a decent year, especially if one factors out [leveraged buyouts]."

Frozen out of acquisitions by the credit crunch, private equity firms have been on the sidelines for much of this year, with global LBO activity coming in at $154 billion from Jan. 1 to Aug. 4, down 74% from the same period a year ago. That has left the M&A field open for strategic deals, which accounted for 88% of global M&A volume year-to-date, up from 75% for the period last year. Strategics will continue to dominate the M&A landscape, with large LBOs unlikely to emerge in the foreseeable future.

"It will be a long while before we see the megadeals return," says Manas. "I don't think we'll see them for some time."

Corporate acquirers, sidelined for years as private equity firms used easy leverage to boost valuations, now have both the ability and the desire to do deals. Many are flush with cash, accrued from years of solid earnings, and are looking to make investments, emboldened by available financing, the declining stock prices of target companies and the lure of boosting earnings amid an economic downturn.

"Strategic buyers with strong balance sheets and strong equity valuations are seeing this as a unique window," says UBS' Kochman. Indeed, Verizon Wireless saw a timely opportunity this spring when the banks backing last year's leveraged buyout of Alltel Corp. were preparing to sell the regional cell phone company's bridge financing at a steep discount.

In June, Verizon snagged Alltel with an offer that included a $5.9 billion cash payment, the assumption of $22.2 billion in debt and an up-front purchase of $5 billion in bridge financing at a $220 million discount.

For corporations doing deals in these uncertain times, caution seems to be the name of the game. That's leading to less cookie-cutter, more complicated structures that vary from deal to deal and often include innovative financings, novel ways to reach valuation agreements and new deal partners. The environment has "put a premium on structuring skills," says Mark Shafir, Lehman Brothers Inc.'s global co-head of M&A. "We have to be in tune with the capital markets." Manas says Deutsche Bank is customizing financing packages, which require increasing the communication between the bank's finance and M&A departments. "The approach we take is, 'Let's think about the market, the liquidity of every instrument, and determine what works best for the client,' " Manas explains.

For well-capitalized, highly rated companies, financing is available and abundant, bankers say. After all, banks have to lend money to make money. And, despite rising premiums, cash-rich companies can also make acquisitions fairly cheaply nowadays, since interest rates are relatively low and valuations have declined.

So it's easier to reach a deal that is accretive for the acquirer, which is especially attractive when the economic outlook bodes poorly for organic growth.

However, the continuing downturn has ignited concerns among acquirers about how a target would weather a recession. There's also the fear of taking on too much debt in an environment that clearly favors deleveraging. Target performance and financing are risks inherent to all M&A, but in this climate, corporations are more wary of making a move that will leave them worse off.

"The equity market is pretty unforgiving of earnings shortfalls, being overleveraged and companies that have poorly integrated recent acquisitions," says UBS' Kochman.

Thus companies are coming up with ways to share the risk, giving acquirers more wiggle room should anything go wrong. Take, for example, Dow Chemical's $18.8 billion all-cash deal for Rohm and Haas. Even though Dow had about $9 billion coming from a joint venture with an arm of Kuwait Petroleum Corp., it opted to bring in Berkshire Hathaway Inc. and the Kuwait Investment Authority for a total $4 billion equity infusion, lowering the debt load. In another case, in its $3.5 billion deal for the Weather Channel, General Electric Co.'s NBC Universal Inc. partnered with private equity firms Blackstone Group LP and Bain Capital LLC.

Though cash remains a popular currency, the caution on leverage may lead to larger stock components in deals as investment-grade companies guard their balance sheets. Convertible instruments are also gaining in popularity, since they allow companies to take on more leverage while pushing off the dilution of straight equity.

Besides creative structuring, reaching consensus on valuation remains a focus for dealmakers. A common outlook on value is one of the factors that create a robust M&A market, and getting there is harder when equity markets are volatile, say M&A bankers.

Creative structuring can help bridge that value gap, as in German healthcare group Fresenius SE's $4.7 billion stock purchase of APP Pharmaceuticals Inc., announced July 7. There, a contingent value right, or CVR, provided a potential $970 million upside to the base offer, contingent on APP meeting financial targets through 2011.

Unsolicited bids are another trend that is likely to continue for the near future. The stock market decline hasn't hit all companies equally, which has left some more vulnerable to takeovers than others. If their managements and boards don't see their lower stock prices as an anomaly or a temporary blip, or if they see good prospects for turning around their fortunes, they are likely to spurn M&A overtures, even those with rich premiums. Meanwhile, potential buyers see the premium offered and wonder: "How could they not talk to me?" Unsolicited bids, however, may level off with time as companies resign themselves to the new market valuation.

A longer-term trend, cross-border transactions, is expected to continue and, in the U.S., accelerate, due to the weak dollar. According to Dealogic, second-quarter U.S. target M&A volume of $124 billion was the highest for that period on record and up 23% from a year ago.

Belgium, where beer powerhouse InBev SA made a successful, unsolicited $55.4 billion bid for Anheuser-Busch Cos., led the pack, followed by Spain and Canada.

Going forward, the hottest sectors for deal activity are expected to be energy, mining, commodities, some industrials, consumer and healthcare. In the wounded financial institutions sector, buyers are more likely to opt for equity infusions rather than outright purchases, since the former won't endanger their balance sheets with toxic instruments.