Global deal environment set to deteriorate into H2 2008, claims KPMG’s Global M&A Predictor
• Further reductions likely to occur in levels of both deal value and volume, with KPMG’s forward looking corporate valuations down 10 percent compared to six months ago
• Previous pockets of regional resistance likely to give way to broad-based fall in deals across all regions and sectors
• All regions bar Latin America has shown a fall in their respective forward PE Ratios
• Most Rapid fall predicted for Africa and the Middle East
• Whilst balance sheet capacity remains robust, the Predictor is showing deterioration in net debt to EBITDA ratios across the board
KPMG Corporate Finance’s Global M&A Predictor forecasts a continued fall in global merger and acquisition activity (M&A), into the second half of 2008. Having accurately called the top of the M&A market a year ago, the latest version of KPMG’s Global M&A Predictor provides compelling evidence of a decreasing appetite for deals and deterioration in the capacity to do deals globally.
Stephen Barrett, Global Chair, KPMG’s Corporate Finance practice, commented: “Findings from our latest Predictor reveal strong evidence that market conditions for M&A transactions will continue to deteriorate. We had hoped that the gradual decline seen earlier this year could be maintained but now all indicators are pointing at a marked fall in the market, across all regions and sectors.”
The latest Predictor - a forward looking index of 1,000 leading companies’ estimated net debt to EBITDA ratios and forward Price Earnings ratios – sees the largest fall in global forward PE ratios recorded to date. This decrease in corporate valuations (down globally 10.3 percent from 17.0x to 15.3x in the six months to the end of May 2008), in KPMG’s view, indicates a lessening appetite to execute deals. In addition, net debts to EBITDA ratios have moved from 0.81 times to 0.93 times – indicating that the capacity to drive deals through debt may soon be negatively impacted and deteriorate.
Commenting on KPMG’s Global M&A Predictor:
Julian Vella, KPMG’s Corporate Finance Chair for the Asia Pacific region, said:
“The deterioration over the last six months in both the forward PE valuations and Net Debt/EBITDA ratios for companies across the Asia Pacific region suggests that M&A activity will be more subdued during the remainder of calendar 2008. This is also borne out by the recent decline in the level of global M&A activity. However, we continue to hold the view that this region exhibits a number of fundamental characteristics which should continue to support a reasonable level of M&A activity. These include, for example, the continued high levels of GDP growth of many economies, opportunities for regional and sector consolidation and an ongoing focus of larger players across the region to make strategic acquisitions in certain key sectors such as those closely linked to resources and financial services.”
“On a more pessimistic note, and as our previous release indicated earlier this year, we do expect a material increase over the short to medium term in transactions involving stressed or distressed businesses across the region, particularly in segments which are highly correlated to consumer confidence, such as retail and property. Accordingly, we predict investors and advisers who specialize in restructuring situations to be kept busy for a while yet."
Looking outside the Asia Pacific at prospects in Europe and the Americas, Stephen Barrett commented:
“European deal activity has definitely gone ‘off the boil’ with Price to Earning multiples down a worrying 12.4 percent. While Europe may still have the potential for mega deals, which could skew average deal values overall, the likelihood is that we will see a worsening of the situation, with corporate balance sheets also expected to weaken, down 16.2 percent, by comparison to other regions. There is a stark contrast in the Americas with North American PE ratios down 8.7 percent and Latin America up 6.3 percent. However, balance sheets have deteriorated overall. Prospects of a speedy recovery look decidedly weak.”
