This year’s crisis in the credit markets is expected to create next year’s intriguing opportunities for companies in the market to acquire, according to the Transaction Services group of PricewaterhouseCoopers.

But PwC’s report says that 2008 merger-and-acquisition activity will be dominated by U.S. strategic buyers and foreign corporations, rather than the financial buyers who led the way for much of 2007. And the accounting firm is looking for the U.S. middle market to continue at its high level of M&A activity as the new year begins.

“The era of public-to-private transactions is on hold for now,” according to Bob Filek, a partner in the PwC Transaction Services group. He added in the report that much of the downturn in mega-deals by private equity firms will be offset, as the continued weaker dollar leads more international buyers to find targets in the U.S. Still, added Filek, “We also believe that more traditional private equity transactions will build momentum as 2008 progresses.”

The big wild card in M&A activity is financing, of course. If there continues to be little liquidity for leveraged financing, don’t expect the financial players to be too active.

At the same time, the persistence of the liquidity crisis, along with sagging volume, would bring prices down, PwC predicted, enticing savvy, nimble opportunistic buyers to jump into the market.

“The core fundamentals of corporate borrowings on the leverage market are solid relative to historical standards,” Filek insisted. “Leveraged lending caught a cold from the sub-prime mortgage market.”

Through November, announced U.S. activity totaled $1.53 trillion, compared to $1.63 trillion for all of 2006, which was a record year for M&A deal volume, according to Thomson Financial numbers cited in the PwC report. While activity by financial buyers has fallen dramatically in the fourth quarter, already the growth in activity among strategic and foreign buyers has offset some of the decline, PwC pointed out.

Meanwhile, cross-border deal values through November totaled $354 billion, representing 23 percent of the U.S. total. That already represents a 73 percent increase from the cross-border deal value of $204 billion in all of 2006, according to the report.

While cross-border activity enters the new year in a strong condition, and strategic buyers continue to dominate, private equity firms will continue to be preoccupied by trying to salvage the deals they committed to in 2007, according to the report. PwC pointed out that of the $350 billion to $450 billion in credit overhang reported early in the second half, nearly $245 billion remains — $145 billion in debt and $90 billion in bonds.

Greg Peterson, a partner in PwC’s Transaction Services group, said the backlog could clear during the first quarter, possibly enabling the marketplace “to reset itself.” Added Peterson, “History shows us that it is during these times of uncertainty some of the best deals are done by private equity and corporate buyers.”

While the number of large deals dwindled in the second half this year, the middle market “barely missed a beat,” according to the PwC report. According to Thomson’s numbers, activity involving deals of up to $1 billion stood at $355 billion as of the end of November, representing 23 percent of the U.S. total. The report noted that 2007 activity still is likely to top for 2006, setting a new record, if only by a tad. “All indicators point to an active middle market in 2008,” PwC said.

Industries showing the greatest opportunity for strong M&A are energy, pharmaceuticals and biotech, technology, and media and entertainment, PwC said. And it included financial services in that mix, noting that sub-prime mortagage and collateralized debt obligation exposures still are sending “a negative wave through the industry.” Said the report: “As financial companies address their liquidity, rating, regulatory, and shareholder concerns, opportunities will be available for investors…. Watch for momentum in this area to grow as 2008 progresses.”

Among the other factors that will influence M&A next year, according to PwC: a decrease in deal multiples to reflect fewer eligible buyers, more combinations between private equity and strategic buyers for acquisitions, a higher level of private investment in public equity (PIPE) transactions, a return of alliances and joint ventures, greater activity by sovereign wealth funds, and stronger initial-public-offering interest.