Healthy balance sheets and strong liquidity in debt markets a positive counter to overall increased uncertainty.
The latest edition of KPMG’s International Global M&A Predictor expects the world’s largest businesses to show an increasing appetite for M&A transactions over the next 12 months. The appetite to do deals is predicted to rise by 4 percent over the next 12 months, as indicated by predicted forward P/E ratios (our measure of corporate appetite or confidence). The capacity of corporates to fund M&A growth, meanwhile, is expected to rise by 13 percent over the same period, measured by net debt to EBITDA ratios (our measure of capacity), as companies continue to pay down debt and bolster their cash reserves.
With the Chinese economy cooling down, the US starting to raise interest rates and oil prices depressing the economies of oil exporting countries, uncertainty has increased significantly going into 2016.
“We expect strong transactional activity in many western economies in 2016 with healthy balance sheets, profit levels and strong liquidity in the debt markets among the highlights,” said Leif Zierz, KPMG International Global Head of Deal Advisory. “Increased sector convergence and ongoing digitalization make a compelling case for future strategic adjustments. However, emerging market economies are expected to remain challenging.”
The positive picture comes despite some uncertain economic indicators, such as a predicted fall in net profits of 7 percent globally. It appears that analysts are pricing this decline into their predictions, however, with market capitalizations only expected to see a 3 percent reduction.
Europe is expected to be one of the strongest performers. The 10 percent increase in appetite seen here is more than double the global average. In Asia Pacific (Other) and Asia Pacific (Japan), the figures area a more modest 6 percent and 4 percent respectively. In North America, the positive environment for M&A activity in 2015 is expected to continue, with analysts expecting confidence levels to remain unchanged.
Analysts are anticipating that the growth in capacity of corporates to undertake M&A transactions will be based largely on the reduction of debt, with some help from positive EBITDA.
The expected growth in North America capacity (15 percent) is led by the United States at 16 percent, suggesting that the United States is still on track to match last year’s strong performance for M&A. This ties in with the KPMG U.S. M&A Outlook Survey 2016, which found that the high level of M&A activity is expected to continue into 2016, driven by record cash balances.
Capacity in Europe is expected to increase by 12 percent. This compares to Asia Pacific (Other) at 19 percent growth and Africa and the Middle East, at 18 percent.
Energy is expected to see the highest increase in M&A appetite during 2016, at 23 percent. Basic materials is at 12 percent and Consumer staples at 6 percent.
In terms of capacity, Technology is the star performer, with an expected increase of 90 percent, as tech companies continue to increase their cash stockpiles.
“Despite recent market jitters, the expectation that M&A activity will remain robust in 2016 is well-founded based on corporates’ ample cash reserves and their desire for growth coupled with consistent demand for quality opportunities from private equity sponsors,” commented Phil Isom, Global Head of M&A.
The total value of all announced transactions worldwide climbed by 31 percent in value from US$2,828 billion to US$3,709 billion. This diverges significantly from the total value of all completed transactions worldwide, which declined by 40 percent during 2015 (from US$2,513.5 billion to US$1,510.3 billion).
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.
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