While the carnage of the recent financial crisis and market crash are still fresh in the minds of investors, mergers and acquisition activity returned to pre-crash levels in the first quarter of this year.

That quarter saw 791 Canadian M&A announcements, worth almost $51 billion, according to a detailed report from Delaware-based consulting firm PricewaterhouseCoopers LLP. That’s 81% higher than in Q1 2010 and, in dollar terms, back to the high-water mark achieved in Q1 2007.

In 2007, the value of M&As set a record for the Canadian market, racking up $243 billion. By comparison, says the PwC report, $155 billion worth of deals were consummated last year.

Although the numbers are similar to the previous high, the report says, the M&A market of 2011 is “dramatically different [from] 2007.”

The PwC report identifies encouraging signs of diversity in deals in various industries not seen since before the downturn. But, it says, the activity remains concentrated in areas such as the resources sector. Traditional energy, mining and agricultural commodities accounted for 49% of the deal market in Q1 2011.

Says PwC’s Canadian deals leader Kristian Knibutat: “[The M&A activity] is still focused on a number of sectors.”

When the deals are broken down by industry, the commodities-driven trend becomes evident. Materials accounted for 36% of activity, followed by energy (13%), financials (12%) and industrials (11%).

Canada is also experiencing more commodities deals than its resources cousin, Australia, the PwC report notes, and the commodities concentration is “likely only going to intensify in today’s hot commodity market.” (PwC also tracks deals in the alternative energy sector.)

Although the public markets are frothy, the M&A activity is uneven, according to Knibutat: “Some of the more traditional areas, such as private equity, are still not playing at the same level that they were pre-crisis. I think there are some concerns percolating in the pension fund space around the cost of doing some of the deals.”

Overall, the prospects for M&A over the balance of this year are upbeat. “The pension funds do have a lot of capital to deploy,” Knibutat says. “They are going to continue to look for good opportunities, whether they want to diversify a little bit out of the public markets and put more in private. I think you will see more creativity around transactions — particularly coming from the pension fund space; maybe the private-equity space as well.”

Knibutat cites the $1.03-billion deal by two Canadian pension funds to acquire TimberWest Forest Corp. in April as an example of pension funds getting more creative in their deal-making.

Knibutat says that increased private-equity M&A activity is expected, based on surveys PwC has carried out with owners of private companies. “As the markets start to return, I would expect to see a continued uptick in the level of private-company deals,” he says. “The sense now is that probably fewer of those are going to result in passing on to the next generation. There will be more supply of businesses for sale in the Canadian marketplace as a result of [boomer-aged owners selling].” As well, he adds, management buyouts should rise and, perhaps with that, a resurgence of managed buyout funds.

Plenty of cash on the balance sheets of corporations should also fuel acquisitions over the course of the year, PwC’s report says.

Big deals for Q1 2011 include Target Corp.’s $1.8-billion purchase of 220 Zellers retail locations from Hudson’s Bay Co., Open Text Corp.’s $182-million cash purchase of Metastorm Inc. and the proposed $7.1-billion all-share merger of TMX Group Inc. and London Stock Exchange PLC.

The PWC report identifies four M&A trends that make 2011 significantly different from the busy years prior to the downturn.

The first trend is the concentration of deal activity in the resources sector, which includes agriculture, alternative energy, junior mining and the booming shale gas and unconventional extraction sectors. Deals are being driven by the international demand for commodities rather than what the PwC report calls “2007-like market exuberance.”

Second, leverage is back — as record quarterly volume of new-issue leveraged loans in Q1 attests — but the majority of new issues were for repricing and recapitalization, not leveraged buy-outs, says Knibutat: “Buyers simply are not ready to march back into 2007 ‘10 times EBITDA plus multiple’ territory.”

Third, corporate buyers, priced out of the M&A market in the pre-crash run-up, are now much more active than financial buyers. In Q1 2011, private-equity firms were involved in only 20% of Canadian deals, down from 29% in Q4 2010.

And, fourth, demand from China should spell opportunities in sectors such as clean energy, health care, consulting services, finance, and biotechnology and nanotechnology. IE