“Overall, the picture is a positive one. Appetite for M&A deals remains strong, capacity is going up and we are starting to see an increasing number of deals being announced,” said Tom Franks, Global Head of Corporate Finance at KPMG. “There is a danger, though, that domestic protectionism, certainly in markets like the UK, France and Canada, could damage the recovery.”
Confidence highest among European corporations
Confidence among the largest European companies remains resilient. Predicted forward price/earnings ratios have risen 24 percent year-over-year, the joint highest of any region. At the other end of the spectrum, forward price/earnings expectations for Japan fell 11 percent between January and June of 2014, reversing most of the gains made between June and December 2013.
Sector confidence remains high
The high level of M&A appetite is apparent across most industries, with predicted forward price/earnings ratios remaining higher over the past year. The only sectors not to record double-digit increases in appetite over the past 12 months were Consumer Discretionary and Consumer Staples. The strongest expectations were for Telecoms, Utilities and Energy.
Deal completions continue to struggle
Despite rising corporate profits and sustained confidence, the volume of worldwide deal completions remains static and the value of these deals continues to fall. Between January and June of 2014, the number of worldwide deal completions fell by 2 percent. It’s a different story for worldwide deal values, which continued their downward trajectory of recent years, reaching their lowest point of the last 12 months in June of 2014.
M&A outlook for the US is optimistic
“Executives are reassured by the improving global economy and decreasing uncertainly,” said Dan Tiemann, lead for Transactions & Restructuring with KPMG in the US. “Large cash reserves and attractive investment opportunities have and will continue to result in more deal-making for US companies.”
Strong appetite for M&A deals in India
India was one of the strongest performers globally, with appetite for M&A deals increasing by 10 percent in the first half of 2014. The capacity of Indian companies to conduct M&A also outperformed the market, showing a 38 percent increase in their capacity to transact. “Market sentiment has improved significantly post the decisive outcome in the general elections earlier this year,” said Vikram Hosangady, Head, Transactions & Restructuring with KPMG in India. “Confidence that the new government will strive to revive the investment cycle and focus on policy and fiscal reforms is expected to keep India very active on the global radar.”
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KPMG’s Global M&A Predictor 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-exceptional basis with the exception of Japan, for which GAAP has been used.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have more than 155,000 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.