Yet another merger has collapsed as a federal judge blocked Staples's planned deal with Office Depot, citing antitrust concerns. Mark Shafir, co-head of mergers and acquisitions at Citi, says the latest failed transaction and regulatory scrutiny are giving clients pause.
"You can't ignore what's going on out in the real world," Shafir told CNBC's "Squawk on the Street" on Wednesday. "It has to impact the way people think about transactions because when these deals break, you've got a damaged goods problem."
M&A is cooling off after a record-breaking $5 trillion in activity last year. According to Dealogic, deals are down more than 20 percent this year, with $481 billion in previously announced transactions called off.
"Some deals that may have been a little more aggressive in their approach are getting pushed back," Shafir said. "I don't think this is just an antitrust phenomenon."
Antitrust regulations are one cause for client hesitation, Shafir said, but so is a recent curb on inversions. The Treasury Department proposed new rules on tax inversions in April, halting a proposed deal in its wake. U.S. drugmaker Pfizer terminated a $160 billion deal to acquire Allergan after the Treasury's proposal and scrutiny from the Obama administration. The acquisition would have slashed Pfizer's tax bill by domiciling in Ireland, where Allergan is located.
"I do think if you're looking at a transaction that's very close to the edge, you've got to think twice," Shafir said.
Most of the drop-off in volume, he said, has been for deals valued at $10 billion or more, which are down 50 percent this year, according to data from Citi. While there has been a slowdown, it's not cause for worry, according to Shafir.
"It's not an unhealthy market, it's just not gonna be as good as '15," he said, adding that data trends show a "2014-type" year for M&A, with $3.5 trillion in volume. "I do think that number will tick up based on what we see."
Shafir cited equity markets' recovery from turbulence in early 2016, an "arguably wide-open" leveraged finance market and anecdotal evidence from his bankers as reasons for the optimism.
One area that has held strong for M&A is industrial deals. Twenty-five percent of the top 10 proposed transactions this year are industrial, according to Citi data.
"Industrial last year was a bit off," Shafir said. "So we're seeing a recovery."