According to KPMG International’s Global M&A Predictor, both deal appetite and capacity among the world’s 1,000 largest companies is higher than it was one year ago.
The Predictor forecasts global M&A activity by tracking and analyzing two valuation indicators on a 12-month, forward basis: price to earnings (P/E) ratios, to determine market confidence, and net debt to earnings before interest, tax, depreciation and amortization (EBITDA), to gauge the capacity of companies to fund future acquisitions.
Based on KPMG’s global data, analysts are forecasting an average forward P/E ratio that is 14 percent higher than in the same period one year ago, indicating that companies’ appetite to initiate transactions has increased. Capacity to fund future acquisitions also improved, according to KPMG, as measured by forecasted net debt to EBITDA, which is expected to decline 13 percent globally between June 2013 and June 2014.
“The improving U.S. market and the positive growth forecasts for leading companies in the U.S. are boosting investor confidence worldwide,” said Phil Isom, Head of KPMG Corporate Finance LLC in the U.S. “Relatively easy access to capital, elevated cash levels on corporate balance sheets, and low interest rates in the U.S. translates into high transaction capacity, which is expected to drive deal flow in the coming months.”
The Global M&A Predictor projects that U.S. companies have more capacity than their global counterparts, while overall global confidence for M&A activity remains high. Data from the Predictor’s 362 U.S. companies, serving as the largest single cohort in the report, shows that forward P/E ratios have increased 14 percent compared to June 2012, signifying improved M&A appetite. The capacity for U.S. companies to do deals has also shown a significant improvement, with data indicating a 20 percent reduction in forward looking net debt to EBITDA over the next year.
“Companies within key sectors in the U.S. are contemplating transactions that will diversify their product pipeline and allow them access to new customers and markets,” said Isom. “They’re shifting to a business model focused on growth, reflecting pent up demand for those companies that were hesitant to make inorganic investments during the economic downturn.”
Industrial: In North America, both deal appetite and capacity are poised for improvements, with Industrial companies showing a 21 percent increase in forward P/E ratios and a 20 percent reduction in leading net debt to EBITDA. Globally, the Industrial sector has the strongest potential for transaction activity worldwide, with a significant increase in forward P/E ratios of 21 percent and an 11 percent decrease in net debt to EBITDA, reflecting an improved capacity for deals.
Healthcare: The Healthcare sector in North America experienced a 20 percent increase in forward P/E compared to June 2012, with forward net debt to EBITDA declining 59 percent, outpacing capacity for all other regions. Globally, the Healthcare sector’s forward P/E ratio is expected to increase 20 percent; the sector is also a strong performer for expected deal capacity, with analysts predicting a 54 percent reduction in forward net debt to EBITDA.
Consumer Discretionary Goods: Companies in the Consumer Discretionary Goods sector in North America had a 21 percent increase in forward P/E ratios over last year, and a 15 percent decline in net debt to EBITDA. The Consumer Discretionary Goods sector also has strong potential for transaction activity worldwide, with a 20 percent increase in its forward P/E ratio and an expected 19 percent decrease in net debt to EBITDA.
Technology: The Technology industry in North America is improving in appetite and capacity according to the Predictor, with a 10 percent increase in forward P/E, and a 28 percent decrease in net debt to EBITDA. Additionally, on a global basis, the Technology sector’s forward P/E ratio increased eight percent, while forward net debt to EBITDA declined 29 percent, reflecting a significant increase in deal capacity.
Energy: Although the Energy sector in North America demonstrates a 19 percent increase in forward P/E ratios, signaling an improved appetite for deals, a one percent reduction in forward net debt to EBITDA through June 2014 highlights only a slight improvement in capacity. Globally, an 11 percent increase in its forward P/E ratio is expected, and just a two percent reduction in net debt to EBITDA.
Volume Down, Values Up
According to the Predictor and Thomson Reuters SDC/KPMG analysis, the total number of deals completed worldwide has decreased nearly 10 percent throughout the last year, and in the Americas, deal volume is down just under two percent. Deal value has experienced nearly a two percent uptick globally, and in the Americas, increased six percent.
According to Isom, “Despite declining deal volume, market conditions are pointing to an increase in M&A activity. Companies are also exhibiting economic optimism as indicated by analysts’ performance outlooks. As the global and local economies improve, this should push investors over the edge to initiate transactions that fit well with their growth strategies.”
About the KPMG Global M&A Predictor
KPMG’s Global M&A Predictor, established in 2007, 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-exceptionals basis with the exception of Japan, for which GAAP has been used.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 152,000 professionals, including more than 8,600 partners, in 156 countries.
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have more than 152,000 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.
Contact: Jamie Bredehoft