Confidence is predicted to return to the world’s largest companies, according to the latest analyst predictions, with global forward P/E ratios (our measure of appetite) rising 15 percent over the past 6 months and 12 percent year-on-year.
This new found appetite for deals is also matched by an increasing capacity to transact, indicated by the forecast net debt to EBITDA ratio, which also shows an expected improvement of 15 percent over the next year.
It is encouraging that, for the first time in almost 2 years, both the capacity to transact and the appetite for deals have increased over the same period.
KPMG’s M&A Predictor is a forward-looking tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions. The Predictor was established in 2007. It 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 twice a year, using data comprising 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.
The trend over the past 2 years has been for steadily rising capacity – driven by companies’ focus on reducing debt – to be tempered by an equally steady decline in confidence. Over the past 6 months, however, this trend has been halted, with global confidence now rising to match capacity.
In comparison to June 2012, the difference in appetite is stark. In the last M&A Predictor, analyst predictions showed that appetite levels were falling across the board. At the end of 2012, confidence is rising in almost every country covered by the data.
According to Tom Franks, Global Head of Corporate Finance at KPMG; “The figures suggest that the market has reached a watershed. There has been a sea-change in appetite. Companies are ready to throw off the shackles of austerity in the hunt for new opportunities.”
Certain sectors are expected to fare particularly well over the coming 12 months, as the overall macroeconomic picture regains some stability.
Although appetite in healthcare only rose by a modest 11 percent in the past 6 months, it saw a massive expected increase in capacity over the next year of 40 percent. It was a similar story in technology, where a 9 percent rise in appetite – still a healthy increase but below average – was outshone by an expected 32 percent increase in capacity. Industrials saw appetite rise by 22 percent and capacity by 16 percent, while basic materials was another success story, with a 16 percent rise in capacity and a 37 percent jump in appetite.
Despite ongoing troubles in the Eurozone, European corporates are looking particularly confident, with forward P/E ratios (measuring appetite) up 19 percent on June 2012 and up 16 percent over 12 months.
European forecast net debt to EBITDA ratios are similarly positive, showing an increase in capacity of 12 percent over the next year as companies capitalize on the benign interest rate environment to pay down debt.
At a country level, although there are understandably significant variations between markets, the overall trends for confidence and capacity are both overwhelmingly positive. Germany is a case in point, with an appetite increase of 26 percent since June 2012 and a forecast capacity rise of 20 percent. Similarly, in the US, appetite rose by 10 percent and capacity by 21 percent, while Brazil saw a 23 percent rise in confidence but only 3 percent increase in capacity. Even the UK, after the gloom of a double dip recession, matches the global confidence figure at a healthy 15 percent, with expected capacity rising by 11 percent.
According to Tom Franks, the combination of increasing confidence and rising capacity is evidence that the global macroeconomic climate is stabilizing. The US elections are over, the ‘fiscal cliff’ crisis has been averted, and China has begun the transition to a new leadership team. “There is more certainty than there was 6 months ago, and that is feeding through into transactional confidence and capacity levels,” he says.
In China – so often the economic pace-setter – there was a 17 percent rise in appetite since June 2012 and a forecast 12 percent rise in capacity. Remarkably, capacity in India is forecast to rocket by 130 percent, while appetite increased by a modest 9 percent.
The rising confidence levels are beginning to show in completed deals in 2012, with deal values bottoming out towards the end of the year.
Given that the deal statistics are based on completed deals, while the forward P/E and net debt to EBITDA ratios are forecasts, it is perhaps unsurprising that there appears to be a lag between forecast confidence/capacity and completed deal volumes.
Overall, the figures show that the outlook for 2013 is more positive than it has been for over 2 years. The worst of the global downturn seems to have passed and a number of key global markets are regaining some stability. After a prolonged period of negativity, the capacity of corporates to undertake M&A is finally being matched by the confidence to do deals.