Why the M&A boom has legs

NEW YORK (CNNMoney.com) -- Deals keep coming at a fast and furious pace, and - particularly in light of the Chrysler deal announced Monday - it looks like nothing will put the brakes on the current wave of takeovers anytime soon.

According to Thomson Financial, the value of deals worldwide has climbed to $1.97 trillion this year, up 71 percent from the same time in 2006 - which turned out to be a record year for mergers and acquisitions.

The upswing in activity has drawn comparisons to previous peaks in the takeover cycle and raised concerns that some deals will eventually turn sour.

"It's an aberrational market driven by a capital glut and credit bubble," said Steven Davidoff, a professor at Wayne State University and editor of the M&A Law Prof Blog.

Despite concerns that some bad deals are getting done, analysts say there are many reasons for the merger mania to keep on going.

For one, unlike the merger craze of the 1990s that was driven by the tech and telecom firms, deals now are occurring across a broad array of industries.

"All the industries are hot - industrial, consumer, health care. Not one industry is driving the M&A boom today," said Alan Alpert, managing partner of M&A Transaction Services for Deloitte Tax.

Diversification isn't only occurring by industry but globally as well. Targets in emerging markets are attractive to many companies looking for growth, and deals are occurring around the world.

The current deal boom is more like the 1980s than anything else, according to Davidoff. "We're reliving the 1980s, with private equity driving the market," he said.

Private equity firms - which buy mostly public companies, take them private and retool them with the aim of selling them at a profit later - have been on the hunt for deals.

The latest came Monday, when DaimlerChrysler (Charts) agreed to sell a majority stake of its Chrysler arm to private equity firm Cerberus for $7.4 billion.

But private equity firms aren't the only ones swooping in on companies. Corporate buyers, buoyed by strong earnings and the stock market rally, have been ramping up their acquisition activity as well.

Rupert Murdoch's News Corp. (Charts, Fortune 500) made a $5 billion takeover offer for Wall Street Journal publisher Dow Jones (Charts) early this month. Aluminum giantAlcoa (Charts, Fortune 500) has made a bid for smaller rival Alcan (Charts), and Dutch bank ABN Amro is the target of a takeover battle that would be the biggest banking deal ever.

"Corporate acquirers could add fuel to the fire as they get more active. Corporate players don't want to sit back and watch private equity take over," said Mike Rogers, a principal at Ernst & Young's Transaction Advisory Services practice.

Corporate buyers not only have cheap debt at their disposal, but also have the luxury of using their own stock as currency. The run in the stock market has made share prices rather attractive in some industries, strengthening the purchasing power for some buyers.

Rogers, who advises private equity firms and corporate buyers before a deal offer is made, expects the M&A market to remain robust. "Our clients have been telling us they still see good buying opportunities," he said.

While competition for deals has pushed up prices, investors still are swarming to deals. Analysts and investors rush to identify the next takeover target, underscoring the optimism that has helped drive the current wave of buyouts.

"People in general are very confident about the economy, stock market and earnings potential," said Deloitte's Alpert, but it doesn't look as if investors are getting too much ahead of themselves.

While stocks have been rallying, the stock market's rise since 2001 has been gradual and the market isn't really in a frenzied state, he said.

As long as nothing shakes the core of investors' confidence, then that bullish view is likely to continue - and the merger boom right along with it.