- India and Germany expected to see substantial slow down in M&A this year
KPMG International’s latest Global M&A Predictor shows that the first six months of 2012, and beyond, are likely to be tough for M&A. The gradual year-on-year increase in confidence since the nadir of the downturn in 2009 is over, in the face of increasing concerns about the economy, not least in the Eurozone. Forward price/earnings (PE) ratios have fallen by 5 percent since June 2011 and 14 percent since January 2011. Although this is a slower rate of decline than in the previous six months, it suggests the gradual improvement in M&A over the past two years is coming to a halt.
David Simpson, Head of Global M&A at KPMG and a partner in the UK firm, comments: “The first half of 2012 – and most probably the rest of the year – will be a hard slog for dealmakers around the world. Serious economic wobbles, not least in the Eurozone, have dampened corporate appetite for deals. However, we are not predicting a cliff-style drop: deal activity is more than possible with corporate cash, private equity coffers and availability of target companies plentiful. The real test will be whether companies have the stomach to pursue deals.”
Fall in confidence contrasts with rise in capacity
The Predictor shows that the fall in confidence contrasts with a rise in the capacity of companies to embark on M&A activity. With net debt forecast to drop 12 percent globally and net debt to EBITDA ratios expected to be down 18 percent, balance sheets appear in good shape. This shows that there is the capacity to undertake transactions, but it is not matched by the appetite. Instead, companies are prioritizing debt reduction and balance sheet management.
All sectors expect net profits to fall
Simpson went on to say, “Across all sectors, year ahead net profit expectations have dropped since our survey last summer. This is the first time in two years that this has happened , with the pinch being felt especially in basic materials, industrials, utilities and consumer discretionary.”
Against this backdrop, confidence in many industries is predictably muted, with forward P/E ratios particularly down in basic materials (14 percent down) and industrials (9 percent down). Some sectors are bearing up better than others, however: consumer staples actually registers a 2 percent forward P/E ratio increase.
Taking a longer term view, signs are more positive for healthcare. Despite registering a 3 percent forward P/E ratio decrease between June and December 2011, this is on the back of two successive six-month increases, leaving the industry in an overall healthier situation than it was 12 months ago.
North America and UK holding up better than other regions
Simpson went on to say: “There are big variations between some of the world's major economies with India and Germany showing confidence drops of 19 and 18 percent respectively over the last six months compared with the UK with only a 2 percent drop and the US which remains flat. The US saw a drop of just 3 percent in market capitalization over the last six months, compared with a 10 percent drop globally. It may seem surprising that the reliably solid Germany and high growth market of India are predicted to slow to such a great extent but this demonstrates just how volatile markets are at the moment. Under the current economic circumstances, the predicted UK and US markets look ‘least worst’ of the major global M&A markets.”
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For further information, please contact:
Sorrelle Cooper, Senior PR manager, KPMG
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KPMG Press Office: 020 7694 8773
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 152 countries and have 145,000 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.
About the Global M&A Predictor:
KPMG’s Global M&A Predictor, established in 2007, is a forward looking tool that enables 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 offer a good guide to overall market confidence, while net debt to EBITDA (earnings before interest, 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 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.
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.
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.