| KPMG: Dramatic loss of confidence postpones reopening of M&A market |
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13/07/2010 11:32 (589 Day 03:29 minutes ago) | |||||
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The FINANCIAL -- A severe loss of confidence has postponed the anticipated reawakening of the M&A market, claims KPMG International's latest Global M&A Predictor.
Although the latest Predictor shows forecast net debt to EBITDA ratios coming down by 20 percent - indicating increased deal-making capacity - forward PE ratios have tumbled by the exact same amount, suggesting that deal-making appetite is under severe pressure.
Although the latest Predictor shows forecast net debt to EBITDA ratios coming down by 20 percent - indicating increased deal-making capacity - forward PE ratios have tumbled by the exact same amount, suggesting that deal-making appetite is under severe pressure.
The previous Predictor, released in January, showed forward PE ratios up by seven percent and net debt ratios forecast to fall by 18 percent. This indicated that the M&A market would once again be open for business. However, it is now clear that confidence has ebbed away during the past six months and prospective corporate purchasers have yet to re-open their war-chests.
From a statistical point of view, the problem arises from six months of flat or falling market prices. Although analysts raised their forecasts of projected 2010 earnings by 18 percent between December 2009 and June 2010, prices fell by five percent globally. This has resulted in a diminished forward PE ratio of 11.9x - down 20 percent from the 14.8x predicted in December.
Africa and the Middle East was the only region not to suffer from falling stock market values while North America’s were flat. All other regions registered a decline, with Europe suffering the most at -11 percent.
Commenting on the latest Predictor results, David Simpson, Head of Global M&A at KPMG and a partner in the U.K. firm, said: “M&A has always been a confidence game and the latest Predictor suggests that it is currently in short supply. January’s Predictor hinted at an imminent market revival but that now looks like a false start. I firmly believe that the loss of market confidence is directly attributable to disquiet over a possible double dip recession and the possible fall-out from sovereign debt defaults. I said back in January that I foresaw the market reopening in 2010 and I still expect that. However, that reopening will now come later than we originally thought - and it is dependent on fears of recession and sovereign debt coming to nothing.”
“On a more positive note, increased earnings expectations and reductions in forecast net debt ratios suggest that the foundations for future M&A activity are being laid. The ammunition is certainly there but there is an unwillingness to pull the trigger. The body is willing but the mind is not so sure.”
Global deal values on a trailing twelve months basis have bottomed out during the course of this year although deal numbers have continued to fall . Simpson points out that the reawakening of the M&A market for larger deals will have to be led by corporates rather than the Private Equity (PE) community. The problem for the latter is that as long as the banks remain preoccupied with their current problem loans and unsure about their own future capital requirements, debt for large LBOs will be very scarce.
Smaller, mid-market deals by PE players are however already leading the way in some markets, with PE houses under pressure to spend existing funds and to realise quality investments before their next round of fund-raising.
David Simpson concluded: “Within the modest deal activity we are currently seeing, there is an unusually high percentage of quality assets. When these are within the reach of the middle-market PE players (i.e. with values of below US$750m or so), they are attracting very high prices. This reflects their safety and their rarity in an uncertain environment. The lesser quality assets are simply less likely to be put up for sale. The owners of these companies are not happy with the prices on offer for them and low interest rates mean that they are not under pressure to sell.”
“More generally, this confidence malaise makes for a fascinating time in the M&A market. Corporates, banks, stock markets, institutional investors; they were all anticipating a return to M&A at the start of the year but now they’re not so sure whether this is the right time or not. Confidence is a tricky thing to predict - but it is the single key determinant of the short-term future for the M&A market.”
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Global M&A Predictor - July 2010 data Notes to Editors: KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 144 countries and have 140,000 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.
Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
KPMG’s Global 1,000 Index (against which the Predictor is calculated) comprises 1,000 of the largest companies in the world by market capitalization.
All raw data within the Predictor is sourced from Thomson Reuters. KPMG Corporate Finance calculates 12 months forward PE data for each region and sector. This tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PEs test for “paper appetite” i.e. the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only.
Net debt to EBITDA is a respected ratio which indicates capital structure and financial gearing. This ratio tests for “debt capacity” – that is, the relative ability of companies, sectors and regions to originate deals using debt only.
KPMG’s Global M&A Predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. It also attempts to compare and contrast sector regions to highlight possible areas of deal flow. (Note: Net debt/EBITDA ratio calculations are considered not relevant (for the Predictor’s purposes) in the financial services and property sectors. These sectors have therefore been excluded from this analysis.)
KPMG’s Corporate Finance practices provide a range of objective, investment banking advisory services internationally and comprise more than 2,300 investment banking advisory professionals operating in 62 countries. KPMG’s Corporate Finance provides strategic advisory and deal management services covering: acquisitions and disposals; mergers and takeovers; valuations and fairness opinions; structured and leveraged financing; private equity strategies; initial and secondary public offerings; joint ventures and transaction alliances.
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