Deals on the rise as M&A appetite | KPMG | SG

Deals on the rise as M&A appetite and capacity increases

Deals on the rise as M&A appetite

But appetite in Singapore drops; falling prices hit energy industry sector

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The world’s largest corporates are expected to show greater appetite for mergers-and-acquisitions (M&A) and will likely have more capacity to fund prospective transactions in 2015.

This is according to the latest KPMG Global M&A Predictor, a forward-looking tool that helps to forecast worldwide trends in M&A deals.

Globally, predicted forward Price/Earnings ratio – a measure of corporate appetite – has grown seven percent over the past year.

The capacity to fund transactions, as measured by forecast net debt to earnings before tax, depreciation and amortisation (EBITDA), is expected to improve 14 percent over the next year, with the largest companies paying down debt and stockpiling cash.

Said Mr Vishal Sharma, KPMG’s Asia Pacific Head of M&A: "The data indicates a return of confidence in the M&A markets. We are seeing an upswing after almost three years of decline.

"This confidence will drive M&A transactions activity, with both deal volumes and deal values moving in a positive direction during the second half of 2014."

Completed deal volumes and deal values over the last six months reversed the downward trend of recent years. Trailing 12-month statistics show values for worldwide completed deals rose from US$2.09 trillion in January 2014 to US$2.45 trillion in December 2014. In the same period, deal volumes rose from 28,733 to 29,511 (source Thomson Reuters SDC). 

 

Singapore: slight drop in appetite expected

Overall, the data paints an encouraging picture across the globe. Predicted forward P/E ratios for the largest North American corporates rose eight percent during 2014, and capacity to transact is expected to rise by 14 percent over the course of the year. 

There was growth in both appetite and capacity in Europe too, albeit at lesser rates, despite continuing economic and political challenges. Forward P/E ratios rose by a modest four percent over the year, and capacity to transact is expected to increase by 10 percent.

The Asia Pacific region excluding Japan is expecting the biggest increase in appetite: forward P/E ratios rose 12 percent over the last year. The capacity to transact is predicted to rise by 15 percent.

As a whole, ASEAN numbers echoed the global trend, with P/E ratios increasing 10 per cent over the past year and capacity expected to improve by 14 percent. 

However, Singapore bucked the trend. Although the capacity to transact is expected to increase 11 percent, the country’s forward P/E ratio dropped three percent. It is the only country in Southeast Asia to see dropping appetite: Malaysia’s rose five percent; Thailand by 22 percent, Indonesia by 19 percent and the Philippines by 23 percent. 

Said Mr Sharma: "The drop in Singapore’s forward P/E ratio is a reflection in some ways of the global concerns around rising interest rates and weak growth expectations from the large economies of China and Japan. Singapore, being an open economy, feels the effects of these likely headwinds faster than some of the other economies such as Thailand, Malaysia and Philippines. "

 

Energy industry hit by falling prices

Falling oil and commodities prices, as could be expected, put a squeeze on corporates in the energy industry. Profits and market capitalisation fell by 23 percent and 10 percent respectively during the past year. The predicted capacity to transact also declined, as debt levels increased, with an anticipated 17 percent reduction in capacity over the next year. 

Energy is the only industry in the analysts’ data which shows a decrease in capacity.

It was a different story for Healthcare, which showed a seven percent increase in corporate appetite to do transactions compared with 12 months ago and an anticipated increase in capacity of 33 percent to do deals over the next year. 

Technology continues to command a strong position as it improves its cash reserves, resulting in an expected increase in capacity of 73 percent over the next year.

Said Mr Sharma: "Going forward, it will be interesting to see what impact falling energy and commodities prices have on corporate confidence and deals levels, as these are crucial sectors in a number of key markets."

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