With industry consolidation in the U.S. and Europe driving mergers and acquisitions in 2005.

Industry consolidation and a continuing deluge of private-equity money into many industries and sectors are expected to add to mergers and acquisitions deals worldwide next year, according to a new report released today by Standard & Poor’s Ratings Services.

Eight sector-specific reports were also published today that focus on the U.S. and European sectors most likely to experience the greatest activity.

“For the most part, we expect 2006 M&A activity to have overall neutral or slightly negative effects on creditworthiness in various sectors,” says S&P credit analyst David Wood. On top of the immediate consequences of the private-equity funds’ willingness to use leverage aggressively, some fund-owned individual companies may also become more venturesome competitors on price, innovation, and service, thereby cutting into the sales and profit margins of traditional players.

In the U.S., sectors especially affected by the influx of investor capital are aerospace and defense, building materials, retail, and health care. U.S. interest rates, although rising, remain fairly low by historical standards and continue to spur yield-hungry investors to channel capital into private equity and hedge funds. The result of this reallocation includes the funds’ aggressive bidding-up of M&A multiples–in many cases outbidding corporate buyers for assets.

The M&A surge has not been confined to the U.S. and Europe. In Australia, several significant transactions have taken place this year, and such activity shows no signs of abating. M&A activity in Asia has also been extremely active, spurred by favorable borrowing conditions and a strong economic resurgence since the economic crisis there. Japan has been the most active market, but a large number of transactions have taken place in India, Indonesia, and China, with the latter showing the largest increase in activity.