KPMG International’s latest Global M&A Predictor shows that deal appetite among the world’s largest companies is higher than it was 12 months ago, with forward P/E ratios – a measure of confidence, or appetite – up 14 percent from June 2012.
In the shorter term however, uncertainty over macroeconomic factors such as quantitative easing continues to hamper confidence, and forward P/E ratios over the past six months have returned to levels seen at the start of the calendar year.
Increasing capacity to transact
Despite the apparent fragility in appetite, the capacity to transact – as measured by forecast net debt to EBITDA ratios – is set to continue improving, with an expected reduction of 13 percent in global net debt to EBITDA ratios over the coming year. Africa, in particular, is expected to see capacity improve by 34 percent by next year.
“Despite several years of forecast growth in capacity, the market is clearly still affected by macroeconomic factors which are driving down M&A volumes,” said Tom Franks, Global Head of Corporate Finance at KPMG and a partner with KPMG in the UK firm. “This imbalance is likely to lead to continuing tensions between companies and their investors over how to use ‘surplus’ cash.”
Among the brightest spots in the data is Japan with a 24 percent year-on-year increase in appetite and an expected 8 percent increase in capacity. Similarly, the US continues to outperform the market even in tough times. Forward P/E ratios are 4 percent higher than 6 months ago, modest but relatively strong in an uncertain market, and 14 percent up year-on-year. The US’s capacity to transact is also robust, with an expected improvement of 20 percent over the next year.
Deal volumes continue to fall
Global deal volumes fell by almost 10 percent between June 2012 and June 2013, with the Asia-Pacific (AsPac) and Africa and the Middle East regions particularly hard hit. Deal values are equally fragile. After a brief rally at the start of the year, global deal values have fallen back to 2012 year-end levels and seem to be on a declining trend.
“The evidence from the top 1,000 companies is that while confidence is fragile, it is there, and this is reflected in average (as opposed to total) deal values, which continue to increase. Beyond the largest corporates, however, the mid-market and below is continuing to struggle,” commented Mr. Franks.
Industry sectors, too, reflect these general market uncertainties, with significant variations in performance between sectors over the past 12 months. Healthcare, Consumer Discretionary and Industrials are the strongest performers, with forward P/E ratios up 20, 20 and 21 percent respectively since June 2012. But again, over 6 months the figures are weaker. Healthcare is the strongest, with a 9 percent increase since December 2012. Consumer Staples and Telecommunications are the only other sectors to show an increase, at 1 percent and 3 percent respectively. In contrast, Basic Materials has seen a 16 percent decrease in confidence over the past 6 months.
In terms of capacity, Healthcare is again a strong performer, with capacity expected to increase by 54 percent. Technology, too, looks to be in a good position, with a predicted 29 percent increase in capacity over the next 12 months.
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About the Global M&A Predictor:
KPMG’s Global M&A Predictor, established in 2007, is a forward-looking tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions. The Predictor looks at the appetite and capacity for M&A deals by tracking and projecting important indicators 12 months forward. The rise or fall of forward P/E (price/earnings) ratios offers a good guide to the overall market confidence, while net debt to EBITDA (earnings before tax, depreciation and amortization) ratios help gauge the capacity of companies to fund future acquisitions.
The Predictor covers the world by sector and region. It is produced bi-annually, using data comprised from 1,000 of the largest companies in the world by market capitalization. The financial services and property sectors are excluded from our analysis, as net debt/EBITDA ratios are not considered relevant in these industries. All the raw data within the Predictor is sourced from S&P Capital IQ. Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have more than 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.