KPMG’s Global M&A Predictor tracks 12 month forward Price to Earnings multiples (PE) and estimated net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratios to track and establish the direction of M&A activity.
Analysts expect predicted forward P/E ratios (our measure of corporate appetite or confidence) to increase by 11 percent between June 2015 and June 2016. Over the same period, the capacity to transact is expected to rise by 7 percent, as debts continue to be paid down and cash reserves increased.
There are some significant regional variations in the expected rise in global corporate appetite for M&A transactions, as political and market uncertainties continue to take a toll in key markets. China is predicted to see a huge 71 percent increase in forward P/E ratios between June 2015 and June 2016, accompanied by a 15 percent rise in capacity. Compared to the global average of 11 percent for example, the predicted increase in appetite in North America and Europe, at 7 percent and 8 percent respectively, is below par, possibly hampered by wider issues such as the continuing squeeze on oil prices and political instabilities in the Eurozone. This contrast can best be seen in the Eurozone, where Germany and Switzerland were able to increase capacity to transact by reducing debt, while France and the UK declined marginally as debt and EBITDA barely budged.
The tough times that continue to affect the global energy market are evident in the 19 percent fall in market capitalisations of the largest corporates in this sector, from US$4.8 billion in June 2014 to US$3.9 billion in June 2015. Profits are also down considerably, registering a 37 percent decline over the same 12 month period. These figures are perhaps not surprising, given that it is corporates in the energy sector that are likely to be the hardest hit by the low oil prices that appear to be affecting corporate activity right across the global market.
Conversely, healthcare looks more stable, with an 18 percent increase in market capitalisations and a 10 percent increase in profits, reflected in a 7 percent rise in appetite for M&A. Telecommunications is looking strong, with an 8 percent increase in appetite, although capacity is only expected to rise by 5 percent.
Despite the expected rise in confidence, and following a sustained surge in completed deal volumes and values over the latter half of last year, the most recent set of deals data presents a mixed picture. While growth was maintained over the first two months of the year, between February and June 2015 there was a significant fall off in global deal volumes and values. The volume of completed deals fell by 8 percent, while the value of deals saw a 30 percent reduction.
KPMG’s Global 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 interest, tax, depreciation and amortisation) ratios help gauge the capacity of companies to fund future acquisitions.
© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.