A recovery in global M&A activity is forecast for 2011 as deal-making capacity continues to improve against a background of investor caution.
According to the latest KPMG Global M&A Predictor, forecast net debt to EBITDA ratios are set to tumble 18 percent over the next year, suggesting that M&A war-chests are now healthily stocked. Net debt globally will fall by 10 percent, showing extensive deleveraging, meaning that M&A capacity continues to improve strongly.
However, it is the forward PE ratios within the Predictor which will likely attract most attention – as an indicator of deal-making appetite. Globally, forward PE ratios are 11 percent down over the last twelve months (down from 14.4x to 12.8x).
Typically, this would suggest diminished deal-making appetite yet the decline should be viewed in the context of rising markets (up 12%) and even faster earnings expectations (up 26%), both of which are historic leading indicators of greater M&A activity.
Combine this with evidence that 2010 global deal activity rose to a level above that of 2005 and it leads KPMG to sound a positive note about predicted deal activity.
Tony McNaught, Head of Corporate Finance says, “While this is global data, anecdotally this is of relevance as M&A activity in New Zealand typically follows global M&A trends.
“In the current climate, we still expect M&A activity to be dominated by deals which have strong strategic rationale. Indeed these deals are likely to succeed at the expense of the more speculative activity, which we saw in the earlier part of the last decade – this is consistent with current investor sentiment and a general tone of caution”.
The demand side of 2010's deal-making recovery has been driven by a number of factors including the steady build-up of cash by larger companies and the need to develop business scale, access new markets and technologies. This will be enhanced by the supply side in 2011, driven by a deal overhang from a variety of investors who have taken a wait and see approach over the last couple of years.
“Although there is clear evidence of investor caution, we are starting to see some investors willing to move more quickly than others,” says Mr McNaught.
“What you tend to see is management teams keen to pursue growth ambitions coming up against investors who have a more cautious approach. Investor caution largely relates to lingering economic uncertainty which will inevitability take time to fully disperse. With improving sentiment we see that local investors are more cognisant of what is happening in global markets including developments in Asian markets.”
The Global M&A Predictor states: “The expression often used at times like this is ‘climbing a wall of worry’ - in that the stock market is improving despite certain ongoing concerns or negative sentiment, including nervousness about interest rate rises and inflation. That’s exactly what’s happening in the global M&A market. Not everyone can bring themselves to endorse the optimism and some people are just faster climbers than others”.
Media enquiries: To interview Tony McNaught, please contact him on 021-667-165 or 09-367-5339.
Alternatively, contact Sneha Paul Gray on 09-363-3590 or at email@example.com.
About the Global M&A Predictor: KPMG’s Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.
Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
KPMG’s Global 1,000 Index (against which the Predictor is calculated) comprises 1,000 of the largest companies in the world by market capitalization.
All raw data within the Predictor is sourced from Thomson Reuters. KPMG Corporate Finance calculates 12 months forward PE data for each region and sector. This tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PEs test for “paper appetite” i.e. the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only.
Net debt to EBITDA is a respected ratio which indicates capital structure and financial gearing. This ratio tests for “debt capacity” – that is, the relative ability of companies, sectors and regions to originate deals using debt only.
KPMG’s Global M&A Predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. It also attempts to compare and contrast sector regions to highlight possible areas of deal flow. (Note: Net debt/EBITDA ratio calculations are considered not relevant (for the Predictor’s purposes) in the financial services and property sectors. These sectors have therefore been excluded from this analysis.)
KPMG’s Corporate Finance practices provide a range of objective, investment banking advisory services internationally and comprise more than 2,300 investment banking advisory professionals operating in 62 countries. KPMG’s Corporate Finance provides strategic advisory and deal management services covering: acquisitions and disposals; mergers and takeovers; valuations and fairness opinions; structured and leveraged financing; private equity strategies; initial and secondary public offerings; joint ventures and transaction alliances.