There’s fresh evidence that 2014 could see corporates getting back on the acquisition trail, as KPMG’s latest ‘Global M&A Predictor’ indicates that restless investors are turning up on the pressure on companies to transact.
KPMG’s bi-annual research reveals that predicted forward price-per-earnings ratios - a key measure of confidence or appetite - were 16 percent higher in December 2013 than they were 12 months earlier, and up 17 percent since June.
Coupled with this are signs of an increasing pressure on corporates to embark on transactional activity, as markedly reflected in the performance of their share prices. Across the board, market capitalisations rose by an impressive 19 percent between December 2012 and December 2013, suggesting that share prices are being buoyed by the increasing growth expectations of investors; expectations which are unlikely to be met from organic growth alone.
“The growing appetite for deals and an increase in pressure to transact are two sides of the same coin,” said Tom Franks, Global Head of Corporate Finance at KPMG. “Investors have been patient over the last three or four years; but as deal capacity continues to rise and global markets maintain some stability, the pressure on cash-rich corporates to start deal-making again is going to intensify.”
Yet, although overall market sentiment is undoubtedly positive, transaction levels have still not caught up. From 30,945 deals worldwide in January 2013, the total number of completed deals fell to 27,194 in December, a drop of over 12 percent. Deal values also declined, falling around 7 percent over the same period.
Tom Franks added: “To date, the steady increase in corporate confidence has not yet translated into an uptick in transaction levels. However, we’re now operating against a background of a red hot IPO market in the UK and the US, so it will be interesting to see whether a change in fortune for the wider M&A market does indeed start to gain momentum over the coming months.”
The capacity and appetite to do deals in the UK reflects that of the rest of the world. Here, predicted forward P/E ratios are up a healthy 17 percent year-on-year, while market capitalisations were up 14 percent.
Jonathan Boyers, partner in KPMG Corporate Finance, added: “We’re now at a slightly curious point in the cycle. Whilst the UK has, like the rest of the world, seen a year-on-year decrease in deal volume and value, there’s no doubt we are starting to see a marked pick-up in the M&A pipeline, encompassing not only the IPO market but also increased appetite from private equity and corporates.
“There’s certainly a lot of pent-up demand in terms of businesses, who spent the recession shoring up balance sheets, now sitting on significant cash reserves. Couple this with a healthy dose of ‘me too-ism’, and we foresee activity over the next six months increasing gradually. Of course, with an average four to six month lead time for deals, it will take a while for this burgeoning confidence to feed through to completions, so the true barometer of whether or not the M&A market is back will not be seen until the second half of 2014 at the earliest.”
Healthcare has consistently been one of the strongest sectors for analyst predictions in recent times, and these positive expectations show no signs of diminishing. Predicted forward P/E ratios for Healthcare companies rose 24 percent over the year, followed by Industrials (23 percent) and Technology (22 percent).
In terms of capacity, Healthcare again leads the way with a predicted rise in capacity of 45 percent over the next 12 months, as measured by the forecast net debt to EBITDA ratios.
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Notes to Editors:
About the Global M&A Predictor 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 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.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals 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.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.