The world’s largest corporates are expected to show an increased appetite for M&A deals and will likely have more capacity to fund prospective transactions in 2015, according to the latest analyst expectations in KPMG International’s Global M&A Predictor.
After three years of decline 2015 predicted to be a hot year for deal making.
Analysts are expecting the world’s largest corporates to show an increasing appetite for deals, with predicted forward P/E ratios (our measure of corporate appetite) 7 percent higher than 12 months ago. The capacity to transact, as measured by forecast net debt to EBITDA, is expected to improve 14 percent over the next year, with the largest companies paying down debt and stockpiling cash.
“The global Predictor data indicates a return of confidence in the M&A markets. For the first time in almost 3 years, this confidence is driving M&A transactions activity, with both deal volumes and deal values moving in a positive direction during the second half of 2014,” said Leif Zierz, KPMG International’s Global Head of Transactions & Restructuring, the deal advisory practice, and a partner in the Germany firm.
This rise in both appetite and capacity is already being reflected in the level of transactions completed, with both completed deal volumes and deal values over the last 6 months reversing 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).
Overall, the data paints an encouraging picture across the globe. Predicted forward P/E ratios for the largest North American corporates rose 8 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 4 percent over the year, and capacity to transact is expected to increase by 10 percent.
“It’s encouraging to see a positive global picture after several years of muted performance. It’s been a good year for M&A overall, particularly in North America where debt markets have recovered,” said Phil Isom, Global Head of M&A, Transactions & Restructuring, and a partner in the US firm.
Falling oil and commodities prices, as could be expected, put a squeeze on corporates in the energy industry. Profits and market capitalization 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 7 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.
According to Isom, “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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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.
Transactions & Restructuring, the deal advisory practice for KPMG, comprises M&A, debt advisory, valuations, transaction services, strategy and restructuring services.
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 155 countries and have 174,000 people 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.