If you said that the current climate in the mergers and acquisitions market was fairly positive it would be like saying that you'd get a fairly deep suntan on a jaunt to the sun. Not to push the analogy too far, but the M&A market is red-hot right now. So what is driving the boom and can the market sustain its incredible level of activity without the bottom falling out?

David Brooks, head of M&A at Grant Thornton, puts the buoyancy of the market down to a bullish feeling of confidence among corporates, lenders and investors after a long period of political and regulatory upheaval.

'In 2002-03, corporates were very quiet in a post-9/11 landscape coupled with worries about Sarbanes-Oxley compliance,' he explains. 'The world is a much smaller place due to globalisation, and companies are saying, "What's the best way to get exposure to new markets like China and India? Do we do a Tesco's and roll out our own sites, or do we get into M&A and buy someone with exposure to these markets?"

'Also, there are a lot of private companies that couldn't sell when the markets were quiet but still want to sell. Corporate bad debt has been quite low and banks are making cash readily available to companies. There are enough banks keen to lend, so it's fuelling M&A activity and driving up deal prices.'

John Cole, corporate finance partner at Ernst & Young, says M&A activity has spiked at levels not seen since the dotcom boom, but with one key difference. 'The bulk of activity is in companies with real people doing real jobs,' he says.

Cole identifies a sentiment change from corporates as they benefit from a benign economic environment and stable inflation. 'Before, dividends and share buybacks were in vogue, but shareholders are now saying, "Do something with this money."'

He also says that the assets on offer for deals dwarf the investment opportunities available. 'There are fewer investment opportunities than there is capital chasing them. You're seeing a scramble for these assets, leading to fairly huge prices.'

One of the major deals in the frame at the moment is the possible acquisition of J Sainsbury. The UK's third largest supermarket chain is currently staving off the advances of private equity players CVC, Kohlberg Kravis Roberts and Blackstone. The speculation has seen Sainsbury's share price rocket - a valuable side-effect of an M&A approach - but opinion is split about whether private equity influence is a scourge or a springboard for the UK economy.

'Private equity players have raised major amounts of cash by clubbing together for deals,' says Brooks. 'They're acting more and more like a trade buyer. Nowadays they want to secure 80-90% of the equity. They're ruthless deliverers of strategy, especially when it comes to aligning management. It's not that it's a bad thing, but they ought to be more accountable.'

Cole offers a slightly different perspective. 'In a well-balanced market you need a mixture of public and private sources. Private equity groups have got a good focus on cash, which, as much as corporates would like to disagree, is a strength they'd like to have. Also, radical restructuring is hard to do in the face of public expectation when you have to answer to analysts. It would be a one-dimensional world without them, but they are not the answer to everything.'

IFRS compliance has been a bone of contention since its introduction for many listed companies in 2005, and the bulk of the AIM market is bracing itself to produce interims in accordance with IFRS requirements this year. With M&A, the awesome spectre of IFRS3 - Business Combinations still looms large, especially with the controversial issues of quantifying goodwill and intangibles.

Corporate finance advisers have come under pressure from auditors to sift through looking for intangibles and it has now become a significant part of IFRS3 valuation work, says Cole. 'There's definitely a pressure to demonstrate that you've looked for all the intangibles,' he adds.

Brooks says that the boom has had knock on-effects on the corporate finance advisory sphere. 'There's a war for talent. At the moment, the acquirers are looking for more and more talented advisers - there's increased demand for the most talented staff with the requisite sector knowledge plus the geographical and cultural expertise to know whether the buyer and target will be compatible. These days this means that corporate advisory operations are having to work harder to recruit and retain the best staff.'

No merger or acquisition deal can ever be called a cast-iron certainty to go ahead until both companies have put pen to paper - and even when they do, the new organisation may not pan out exactly as the prophets forecasted.

'Of course, there's frustration when a deal goes south,' says Brooks. 'Reputations are tarnished and investment banks are far from happy because this is an expensive process. These days, reputation is a more important factor than it has ever been. We all talk about our success stories, but we all get asked, "What went wrong in the failures?" The people who suffer, though, are the employees and the suppliers.'

Brooks predicts that the AIM support services sector will see a surge in activity this year as businesses shed divisions they don't need to operate themselves by outsourcing the services they provide. In general, M&A activity in the food and steel sectors is set to continue and the care homes sector is particularly active due to good multiples, but the M&A boom has generated major deals across a wide spectrum of sectors.

But the question remains, can this purple patch continue unabated or will the wheels come off in spectacular fashion, bringing the market to a halt?

'I think there will be some tears,' says Brooks. 'Some of the deals will not work out as planned.

'The second half of 2007 and the beginning of 2008 feel a bit more challenging than where we are today. Interest rates and corporate profitability all have an effect, but it's the lack of confidence that really destroys the markets. 2002 to 2003 was a really difficult period but it will be a less bumpy ride than last time.'

Putting yourself in the M&A shop window with an IPO

The initial public offering (IPO) is an increasingly common route for listing companies – and, more to the point, a lucrative one. There are two types: public and private.

A public dual-tracking is where a company’s IPO and sell-out occur over a short period of time. One notable example was PayPal, which made a killing on its float when it was snapped up by eBay. The online shopping giant was in negotiation to acquire PayPal so it could boost its payments settled online and enhance its systems with PayPal’s antifraud capabilities. At the time, PayPal was privately held, and the two parties were unable to agree on price. PayPal went public, the equity market certified the value that the company claimed it was worth, and eBay completed the acquisition for $1.5bn (£760m) a few months later – at a20%premium.

Private dual-tracking IPOs have become increasingly frequent and involve companies filing to go public but selling out before the equity offering takes place. Recent examples include Noveon, Advertising.com, Borden Chemical and Brightmail. Sports World completed a successful IPO recently – but what does the future hold for this jewel in the crown?