The North American merger and acquisition resurgence is likely to continue, experts say, following near-record first-quarter deal totals driven by cash-rich companies looking to expand.

A total of 5,621 deals targeting companies in the U.S. and Canada were announced between January and March, the second-highest first-quarter total this century behind the 5,781 deals in 2015, according to S&P Global Market Intelligence data.

M&A slumped in the face of COVID-19 as companies initially prioritized liquidity over expansion, tapping financial markets at record levels to generate the cash required to make up for lost revenues. The recovery in 2021 is expected to persist through the year as economies recover and borrowing costs remain low, even as companies take on ever more debt to fuel deals and market rallies are making those transactions more expensive, experts say.

"Record borrowing since the onset of the pandemic has helped companies pile cash onto their balance sheets, which, along with continued low interest rates, should fuel M&A," David Tesher, head of credit research for North America at S&P Global Ratings, said in an email.

The volume of deals in January and February was little changed on an annualized basis but the growth in value of the transactions in each month was strong, rising by 58.2% and 38.8% year over year, respectively.

The increase in March was even more dramatic — the number of deals rose 42.9% year over year and the value increased by 225.1%. The figures were inflated by the spread of the pandemic in March 2020, which slowed year-ago deal-making.

As a result, the total value of M&A announced in the first quarter of 2021 was $409.13 billion, almost double the $218.04 billion total in the first three months of 2020.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

M&A recovery in 2020

The strong quarterly performance marks a continuation of a recovery that began in the third quarter of 2020 and accelerated in the final three months of the year.

A combination of extensive monetary policy support and government stimulus bills meant companies rode out the storm more easily than expected and by September, M&A activity was recovering.

Funds are now being sought to fuel expansion rather than plugging revenue holes. While company debt levels are higher than they were pre-pandemic, the ability to service that debt has improved and companies find themselves with more cash on their balance sheets than they had before the pandemic.

"Looking in more detail at the use of proceeds from newly issued debt, we note a rise in less creditor-friendly activities such as debt-funded M&A," Andrea Iannelli, investment director at Fidelity International, said in an email. The run-up in debt to pay for M&A could affect corporate credit, Iannelli noted.

Investment-grade rated U.S. companies have sold $83.975 billion bonds to fund acquisitions so far in 2021, according to data from LCD. That is almost double the $44.95 billion of acquisition-related bonds issued in the same period of 2020, the record year for overall bond issuance.

The access to finance, strengthening economic backdrop and a desire to diversify businesses will continue to drive M&A activity, according to Goldman Sachs.

"The experience of the past year has, in our view, underscored the importance of diversification on multiple fronts, including by customer, product, and geography," Amanda Lynam, senior credit strategist at Goldman Sachs, wrote in an April 7 research note. "While some firms may choose to evolve and strengthen their business diversification organically, M&A can be an alternative way to make significant mix changes, quickly."

IT sector led M&A spending in Q1

The industrials sector undertook the most M&A in the first quarter with 939 deals, an increase of 63.3% over the first quarter of 2020 total. While the information technology sector — which thrived despite the health crisis — led the way in terms of value with deals worth $72.53 billion, an increase of 312.5% year over year. IT consulting and electronic equipment companies such as Hitachi Ltd. and Teledyne Technologies Inc. drove deal-making activity in the sector.

Healthcare, which is another sector to do well during the pandemic, undertook the second most valuable M&A with $66.76 billion worth of deals, led by Optum Inc.'s $13.69 billion acquisition of Change Healthcare Inc., the third-largest deal in the period.

Canadian Pacific Railway Ltd.'s $29.2 billion merger agreement with Kansas City Southern was the largest North American M&A deal announced in the first quarter, ahead of Rogers Communications Inc.'s $21.3 billion takeover of Shaw Communications Inc.

Ratings expects M&A to not only flourish in the cash-rich sectors such as information technology and healthcare, but also in those hit hardest by the pandemic as companies must adapt to survive.

The energy sector was hammered by the collapse in demand for oil as economic activity wound down, pressing oil exploration and production companies to pursue M&A in the hope of defying a structural decline in the industry by gaining scale.

M&A activity came to a shuddering halt in March 2020 before picking up in the third and fourth quarters, with notable deals including Chevron Corp.'s $13.76 billion acquisition of Noble Energy Inc. and ConocoPhillips's $13.13 billion merger with Concho Resources Inc.

That momentum carried over into 2021 with a 27.5% increase in first-quarter deals to 116. The value of those deals leaped by 310.1% to $20.13 billion.

Expensive M&A will require more debt

As M&A continues to surge, companies will take on more debt to help fund deals, experts say.

"We are monitoring this trend closely, as it could likely be a catalyst for some weakening in credit markets," Fidelity's Iannelli said.

Meanwhile, Ratings warns that with so much cross-sector money chasing deals, the bargains have probably already been snapped up. The S&P 500 is up 12.1% year to date, while the forward P/E ratio — an important valuation metric that measures the current stock price divided by the predicted earnings per share — for the S&P 500 is historically elevated at 22.81 as of April 29.

"It's worth noting that the run-up in equities could inflate valuations to levels that raise concerns about acquirers' overpaying. Hence, M&A will likely be one of the drivers for additional debt issuance this year," Tesher said.

LCD is an offering of S&P Global Market Intelligence.