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Global appetite for deals remain static as confidence wavers 

Singapore, 29 July 2013
Japan and US among top performers; healthcare is one of the most confident sectors

KPMG’s latest M&A Predictor shows that deal appetite among the world’s largest companies is higher than it was a year ago, with forward P/E ratios – a measure of confidence, or appetite – up 14 percent from June 2012. However, forward P/E ratios over the past six months have remained rather stagnant since the start of the calendar year.

Said Mr Vishal Sharma, KPMG’s Head of M&A, for the Asia Pacific region: “Despite several years of forecast growth in capacity, market confidence is clearly still hampered by macroeconomic factors affecting corporates in Europe and the United States (US). These also have a knock-on effect in Asia, particularly Singapore”.

“The nervousness around global appetite in the past months is reflected in most regions. Nonetheless, confidence in the M&A market is still higher than a year ago in all sectors.”

The M&A predictor, which is produced twice a year, helps companies forecast global trends in mergers and acquisitions. Established in 2007, the predictor uses data from 1,000 of the largest companies in the world by market capitalisation.

Despite the apparent fragility in appetite, the capacity to transact – as measured by forecast net debt to EBITDA ratios – is set to continue improving, as companies pay down debt. There is an expected reduction of 13 percent in global net debt to EBITDA ratios over the coming year.

Africa and the Middle East, in particular, are regions expecting to see capacity improve by 34 percent by next year.

Added Mr Sharma, who is based in Singapore: “This imbalance between appetite and capacity is likely to lead to continuing tensions between companies and their investors over how to use ‘surplus’ cash.”

Bright spots in data

Among the most outstanding 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 four percent higher than six 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.

Singapore’s year-on-year forward P/E ratios have gone up 13 percent. However, appetite in the past six months has grown at a slower pace, with a decrease in forward P/E ratio of five percent. The country’s capacity to transact is expected to increase five percent over the next year.

Mr Sharma said: “Inbound M&A activity is likely to hold up in the consumer sector as the landmark F&N transaction has helped to raise publicity for the Singapore brand. Singapore companies are also looking at Indonesia and Myanmar to expand their presence in Southeast Asia.”

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 confidence, while fragile, is still there. This is reflected in average - as opposed to total deal values, which continue to increase. Beyond the largest corporates, however, mid-market deals are continuing to struggle, though they still comprise a significant proportion of total deals,” said Mr Sharma.

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, the figures are weaker over the past six months.

Healthcare is the strongest, with a nine 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.