Double digit rise in confidence over past 12 months, transaction volumes still low
- Appetite 16 percent higher than December 2012
- Market capitalizations up 19 percent
- Capacity up 12 percent by 2014
- Transaction volumes and values continue to lag
Analysts expect the world’s largest corporates to show a greater appetite for M&A transactions in 2014 than they did last year, according to KPMG International’s latest Global M&A Predictor.
Predicted forward P/E ratios, a measure of confidence or appetite, were 16 percent higher in December 2013 than they were 12 months earlier and an increase of 17 percent since June. The rise in confidence was mirrored by an increase in share prices, with market capitalizations up 19 percent over the year. However, the growing confidence is not reflected in transaction volumes or values, which continue to struggle.
Capacity continues to increase
As well as an increase in confidence, analysts also expect corporates to have more capacity to undertake transactions during 2014 than previously, due to falling Net Debt to EBITDA ratios. These are expected to decline by 12 percent over the next 12 months, giving corporates more financial headroom for deal-making.
The US Federal Reserve’s end of year tapering of quantitative easing could have a temporary dampening effect, but overall the combination of growing capacity and rising confidence suggests a potential rise in transaction levels in 2014, as restless investors start to turn up the M&A pressure after several years of inactivity.
“The growing appetite for deals and an increase in pressure to transact are two sides of the same coin,” said Tom Franks, Global Head of Corporate Finance at KPMG International and a partner with the UK firm. “Investors have been patient over the last three or four years; but as deal capacity continues to rise and global markets maintain some stability, the pressure on cash-rich corporates to start deal-making again is going to intensify.”
Share prices benefit from rising confidence
The pressure to transact is also reflected in the performance of share prices. Market capitalizations rose an impressive 19 percent between December 2012 and December 2013. This suggests that share prices are being buoyed by the increasing growth expectations of investors; expectations which are unlikely to be met from organic growth alone.
Analysts’ positive expectations were apparent right across the globe. In Europe and North America, forward P/E ratio expectations sky-rocketed 19 and 22 percent respectively between December 2012 and December 2013, along with Africa and the Middle East which saw an increase of 19 percent since the first half of the year.
Deal volumes still fragile
Although overall market sentiment is undoubtedly positive, transaction levels have still not caught up. From 30,945 deals in January 2013, the total number of completed deals fell to 27,194 in December, a drop of over 12 percent. Deal values also declined, falling around 7 percent over the same period.
“Steadily increasing corporate confidence is still not being reflected in global transaction levels, and deal markets are continuing to struggle. However, this is against a background of a red hot IPO market in the UK and the US, and it will be interesting to see how the M&A situation changes during 2014,” said Franks.
Healthcare leads sectors
Healthcare has consistently been one of the strongest sectors for analyst predictions in recent times, and these positive expectations show no signs of diminishing. Predicted forward P/E ratios for Healthcare companies rose 24 percent over the year, followed by Industrials (23 percent) and Technology (22 percent).
In terms of capacity, Healthcare again leads the way with a predicted rise in capacity of 45 percent over the next 12 months, as measured by the forecast net debt to EBITDA ratios.
About the Global M&A Predictor
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.
For more information, please contact: