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While much of corporate Europe shut down last week, top officials at the Luxembourg steel company Arcelor were working harder than ever. In the space of just seven days starting Dec. 22, the firm bought a 50% stake in two Costa Rican firms and snapped up 20.5% of a Turkish steel company. By far its biggest move came on Dec. 23, when ceo Guy Dollé announced a $4.2 billion hostile takeover bid for Canada's leading steel producer Dofasco, topping an agreed offer by Germany's ThyssenKrupp.

Arcelor is trying to reduce its heavy dependence on the European market that now accounts for 75% of its business. "Expansion into North America is a key strategic objective for Arcelor," Dollé explained.

Arcelor's hyperactive end to the year was just part of a huge wave of mergers and acquisitions that is sweeping Europe these days; in boardrooms from Manchester to Moscow, cross-border strategies similar to Dollé's are the driving force. In Europe and globally, 2005 is poised to go down in the record books as the third best year for M&A activity in history. Morgan Stanley reckons the total volume of European transactions will hit $1 trillion for the year, or about 44% of the world total, and Paulo Pereira, the investment bank's European head of M&A, sees no sign of a slowdown anytime soon. "The first half of 2006 has to be the best seller's market for a long time," he says. While companies spent the first half of this decade reducing debt and cleaning up their balance sheets, now cheap money — thanks to low interest rates — has revived the M&A boom.

The level of merger activity in Europe is still below the absolute peaks hit in 1999 and 2000, at the height of the Internet bubble, but it has been rising sharply in the past 18 months and is set to exceed 2004's volume by more than 25%. During the first years of this decade, while big companies were digesting previous acquisitions or paring debt, private equity groups such as Carlyle or Blackstone were the key acquirers. But in recent months, corporate buyers have been flocking back to the market. While no industry is immune, the biggest deals have been taking place in energy, banking and insurance, and media and telecommunications.

Last month, for example, after months of slugging it out for subscribers and advertisers, France's two leading pay-TV satellite channels agreed to merge. The CanalSat-TPS deal would create a broadcasting giant in France worth at least $7 billion. That's modest compared with the year's biggest deals: the $28 billion acquisition last June by Telecom Italia of the 44% stake in mobile phone company Telecom Italia Mobile it didn't already own, and the $22 billion purchase by Italian bank UniCredito of Germany's Bayerische HypoVereinsbank. Other major deals included Pernod Ricard's acquisition of British drinks firm Allied Domecq, and a continuing three-way fight for control of that bastion of shareholder capitalism, the London Stock Exchange. According to Morgan Stanley, the number of deals last year with a volume of $1 billion or more doubled from 2004, while the number of transactions exceeding $5 billion more than tripled, to 408 from 130.

Behind this boom is a growing sense among European businesses that they need to get substantially bigger to withstand ever fiercer global competition. A series of Europe-wide measures over the past decade to deregulate and liberalize industries ranging from telecommunications to energy has made this consolidation easier — and more urgent. And the growing role that Eastern Europe plays as both a market and a production site for West European companies is fueling a frenzy of acquisitions there. Mergers involving East European firms soared in value by more than 250% this year, with almost 1,700 deals totaling in excess of $100 billion, according to data firm Dealogic. Stephen Barrett, international chairman of the corporate finance practice of consultants KPMG, says the privatization of many firms in the region is the cause of this sharp increase, as well as a surge in dealmaking by Russian energy firms such as Gazprom, the state-controlled oil and gas giant that in 2005 acquired oil firm Sibneft for $13.6 billion.

Among the striking features of the latest surge in merger activity is that it continues apace everywhere despite efforts by some national authorities to protect companies perceived as national champions. The French government kicked up a fuss about rumors that the food company Danone might be the target of a U.S. bid, and even published a list of industries it deemed to be in the strategic national interest. And in Rome, former governor of the Italian central bank Antonio Fazio tried to squash two bids by foreign banks for Italian ones. But his efforts quickly turned to a scandal after the publication of taped phone calls. Fazio finally quit just before Christmas — and one of the foreign bids, by Dutch bank ABN AMRO for Banca Antonveneta, eventually succeeded. Domestic politics remains a temporary risk, says Morgan Stanley's Pereira, but "the forces underlying European M&A trends are much stronger than any episodic national pushback."

Indeed, mergers have a way of perpetuating themselves. Barrett says that chief executives of European companies are now under pressure from their boards to do deals in order to boost growth. "The subdued M&A activity over the past three years had a lot to do with the fragility of ceo confidence," he says. But companies now are looking at the growing number of deals being made "and they're asking: Are we being too cautious?"

It remains to be seen whether this round of dealmaking will be more successful than the last one, when many firms got caught up in merger frenzy and ended up overpaying for sometimes dubious assets. Several of Europe's biggest companies succumbed, including German automaker DaimlerChrysler, which only recently unwound a costly investment in Japan's Mitsubishi Motors, and France's Vivendi Universal, which briefly teetered close to bankruptcy in 2002 after a huge acquisition binge by its former ceo Jean-Marie Messier. Morgan Stanley's Pereira contends that the latest activity is fundamentally different. "A lot of M&A then was driven by technology, media and telecommunications [companies], where business models were changing and valuations for the business proved, in hindsight, to be ahead of the reality. Today, people are not looking into a 'new paradigm,'" Pereira says. "There's a bubble-effect risk in some sectors, but it's a very different environment."

Daniel Fermon, senior European strategist for French bank Société Générale points out that some companies today are very publicly balking at prices they believe unreasonable; he cites the decision in September by French advertising giant Publicis not to raise its $2.8 billion bid for British media-buying company Aegis. KPMG's Barrett concurs. "We're not seeing the sexed-up transactions we saw in the last bull market. It's looking much more responsible," he says.

The French bank Crédit Agricole is one case in point. Facing ever tougher competition on its home turf, Crédit Agricole believes it needs to grow. So in December, Georges Pauget, the recently appointed chief executive, announced plans to start acquiring banks in neighboring European countries over the next three years. Still, Pauget insisted that "our objective is not growth at any price." And he's not about to bet the farm on a huge deal: the $6 billion over three years that Pauget has earmarked for acquisitions is only slightly more than the company's pretax income last year. If such targeted prudence prevails throughout Europe, this merger wave could be a lot less accident-prone than the last one.

• PETER GUMBEL / Paris
• A wave of merger activity, not seen since the height of the Internet boom, is sweeping Europe. Will this round of deals be sweeter than the last?