The first quarter of 2006 will be remembered as a huge one for mergers and acquisitions.

With AT&T's ( T) acquisition of BellSouth ( BLS) pacing the trend, total merger volume in the U.S. was $331 billion from January through March, according to Thomson Financial, up over 19% from the first quarter last year.

But behind the headlines, a subtler trend has emerged. The total number of deals this quarter fell from both the previous and year-ago periods. With rising interest rates, higher stock prices and an economic expansion in its third year, companies may start being more cautious about their acquisitions.

"Despite the fact that we are growing at a good pace, the growth rates are going to slow," said Marc Pado, chief market strategist at Cantor Fitzgerald. "That in and of itself makes chasing a deal less desirable."

On average, total value per deal was $1.49 billion, compared with about $1.23 billion in the first quarter last year. Larger transactions kept the M&A market buoyed; it was a number of smaller ones that petered out.

Many of the deals announced this quarter were from private equity companies, including Blackstone's acquisition of CarrAmerica Realty ( CRE) for $5.6 billion. Their acquisitions usually come with a heavy debt ticket, something that will get more expensive with rising interest rates.

"Not all of these deals are done by using cash," said Pado. "If there is any debt already or if they are going to have to incur any debt to make the purchase or combination, then the less profitable the deal will be."

Many companies have also done a significant amount of levering and refinancing over the past few quarters, often using proceeds to buy back shares or pay dividends. As firms begin closing in on their leverage capacity, issuing new debt won't be quite as easy.

Meanwhile, rising stock prices don't help either. As the equity market continues to pick up pace, stocks become less of a bargain for interested suitors. Pricey shares have already started to deter acquirers, with the Nasdaq ( NDAQ) dropping its bid last week for the London Stock Exchange because of the high price.

"The fact the small- and mid-cap companies -- your most likely targets for an acquisition -- have soared in value in the last six months doesn't make them the best takeover target," Pado said. "Many of them have moved to fair value, and that is not a good enough deal in this economic cycle."

Still, with the robust first quarter, the U.S. is well on its way to having one of the best merger years in history. "The fact is we are going to be headed for $1 trillion in M&A in the U.S.," said Richard Peterson, senior researcher at Thomson Financial. Peterson says that it will probably be the blockbuster deals that will carry the market to those levels next quarter, with Google ( GOOG) possibly leading that charge.

"The question is what Google does with their money," said Peterson. "They are raising upwards of $2 billion, and that may be used to target acquisitions sooner rather than later."

The future of smaller transactions is less certain.

"In this environment, it has to be just right to make it work and be accretive from the start," Pado said. "Since there are fewer of those deals to begin with, you will see fewer done."

If you liked this article you might like

Fund Flows Go Global

Fund Flows Go Global

Schwab Under Wraps

Schwab Under Wraps

Cowen Gets Buy Calls

Cowen Gets Buy Calls

Instinet on the Block

Instinet on the Block

Kohlberg Leans Into Loans

Kohlberg Leans Into Loans