KPMG Corporate Finance's Global M&A Predictor forecasts that 2009 will see a continued fall in global mergers and acquisitions (M&A) but that deal activity should slowly return late in the year as liquidity improves and attractive value is recognised in certain sectors.
The latest Predictor - a forward looking survey of 1,000 leading companies' estimated net debt to EBITDA ratios and prospective Price Earnings ratios - reveals a significant fall in 12-month forward corporate valuations and therefore appetite to do deals (down globally 22.2 percent from 15.3x end May 2008 to 11.9x at the end of November 2008). Forecast Net debt to EBITDA ratios have moved from 0.93 times to 1.06 times, a 13.5 percent deterioration, signaling a decreasing capacity to do deals.
Paul Chau, Principal, Corporate Finance, KPMG China, commented: "Findings from our latest Predictor confirm our view that 2009 will be a very subdued year for M&A activity. We expect global deal volumes to continue to fall through to Q3 and, with less liquidity in the market and reduced debt market liquidity, appetite and capacity for doing deals will continue to decline."
"However, our detailed analysis of the results of KPMG's Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year. I believe that those people who ended 2008 feeling battle fatigued in the face of endless bad news stories have started the New Year with a desire to kick-start the deals market - something which may be facilitated by the opportunities which will inevitably emerge for value investors in certain regions and sectors. I also believe that the market players to watch will be those able to execute cash deals - such as companies who have preserved cash contingency funds; some sovereign wealth funds; and private family offices. Within 12 months, I think we will start to see some clear signals of a slow, but purposeful, recovery in the M&A transactions marketplace. A reliable indicator that this time has arrived will be when quality assets come on the market and go for reasonable, rather than fire-sale, prices."
When KPMG's Predictor of June 2007 called the top of the M&A market, the latest peak in global deal activity was followed by a significant decline in the average value in deals. Heading into 2008, the January Predictor then provided compelling evidence of a decreasing appetite for deals and a deterioration in the capacity to do deals across all regions and all sectors. By Q2/Q3 of 2009, the latest Predictor indicates that the point will come where deal appetite will improve as cash-rich investors find it hard to resist the deep value in the market. This forecast pick-up in M&A activity, if it materialises, may provide one of the positive indicators needed by economic commentators if they are to signal an upturn in the broader economy.
Mr. Chau continued: "While this M&A downturn is different from previous ones in character, I think we can draw some parallels between the current situation in the deals market and how we emerged from the last big deals recession in the early 1990s. I am feeling very optimistic that we will see a similar pattern emerge this year and next, and that by the close of 2010 we will be able to put this M&A downturn behind us and, crucially, look forward to a sustained recovery in transactional activity. In my view, the global M&A marketplace will be back in business."
Forecast M&A activity by world region
For the first time, the Predictor indicates a declining valuation trend in all regions of the world (see Figure 1) demonstrating the global decline in M&A activity. As last time, the region which had the biggest drop in valuation was Africa and Middle East (PEs down 31.6 percent from 13.3x to 9.1x). Latin America had the second largest fall (28.7 percent from 16.1x to 11.5x) followed by North America (24.6 percent down from 15.9x to 12.0). In contrast to the last Predictor in which Europe experienced the second largest fall, six months on, Europe saw the second smallest fall (21 percent from 13.5x to 10.7x) behind Asia Pacific down 19.9 percent from 17.0x to 13.6x.
Although the capacity to do deals (see Figure 1) has decreased with the global forecast Net Debt to EBITDA ratio moving from 0.93 times to 1.06 times, some regions have seen an improvement in their balance sheets. Latin America and Africa and the Middle East bucked the trend and both saw improvements of 3.2 percent and 35.7 percent respectively with Africa and the Middle East ratio of 0.33 times, the most modest of all. Europe maintains its position as having the highest regional ratio of 1.15 having moved from 0.97 times, a deterioration of 19.0 percent. The ratio that saw the greatest decline was Asia Pacific at 28.1 percent and now stands at 1.14 times. North America saw the smallest decline from 0.94 to 0.95 times.
Commenting on M&A prospects in the Asia Pacific region, Mr. Chau said: "AsPac valuations have fallen the least, though a 19.9 percent decline in PEs is still significant. However, importantly, net debt to EBITDA has shown the largest deterioration of 28.1 percent, albeit from modest levels. Nevertheless, this indicates that the economic slowdown in the region is beginning to bite, stretching corporates' capital structures. However, we expect to see a number of cross-border deals across the region during 2009 as well capitalised corporates take advantage of the current environment to make strategic acquisitions, a trend that is already emerging as we move into the New Year."
Looking outside the Asia Pacific region at prospects in Europe and the Americas, Mr. Chau commented: "Whilst the Americas and Europe have all witnessed significant falls in forward PE ratios, balance sheets remain robust in North America and Latin America, suggesting that some corporates will remain in a strong position should value enhancing acquisitive opportunities arise. Within Europe however, balance sheets have deteriorated by 19 percent, implying that these companies are increasingly less likely to execute deals in the near term."
Forecast M&A Activity by Global Sector
The Predictor has shown a decline in forward PE valuation across all sectors, with Technology (18.4x to 12.6x), Basic Materials (13.8x to 9.6x) and Industrials (15.5x to 11.1x) registering the most significant deterioration. Unlike the previous Predictor, Oil & Gas fell significantly (11.8x to 8.6x) along with Telecommunications (14.1x to 10.8x) Consumer Services (17.0x to 13.5x) and Health Care (15.5x to 12.5x). The smallest decline was the Consumer Goods sector (16.2x to 14.6x).
Utilities and Industrials continue to maintain the highest debt ratios, with net debt to EBITDA at 2.68 times and 2.27 times respectively. The Technology sector continues to show net cash which reflects a traditional balance sheet structure for this peer group but Health Care has moved from a net cash position to one of net debt.
Contrary to the last Predictor, the Net Debt to EBITDA ratio for Oil & Gas has weakened from 0.34 times to 0.48 times (though O&G retains the strongest balance sheets of all sectors bar Technology and Healthcare), a reflection of the falling oil price estimates, whilst Consumer Services has improved from 1.21 times to 1.10 times.
No sectors/regions have shown improvement in both valuation and balance sheet capacity in the last six months, providing evidence that all sectors and regions have seen a decrease in both appetite and capacity.
The biggest drop in forward PEs was witnessed by Industrial Africa & Middle East (17.9x to 7.3x) followed by Basic Materials Latin America (14.2x to 6.9x) and Health Care Latin America (17.4. x to 9.0x).
The sectors/regions with the greatest balance sheet deterioration were Technology Latin America (0.19 times to 0.34 times), Consumer Goods Europe (0.84 times to 1.49 times), Oil & Gas AsPac (0.39 times to 0.63 times) and Oil & Gas North America (0.31 times to 0.49 times).
- Ends -
Notes to Editors:
KPMG's Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.
KPMG's Global 1,000 comprises 1,000 of the largest companies in the world by market capitalization, with a representative weighting of countries and sectors, to help ensure appropriate inclusion. A Global 1,000 panel of KPMG firms' professionals sits every half-year and reviews the constituents of the index to seek to ensure that it remains reflective of global changes in regional and sector weightings.
The data is sourced from FactSet, the corporate earnings estimates data provider. KPMG calculates 12 months forward PE ratios (expressed as a multiple) for each qualifying company of the 1,000, and aggregates these into regions and sectors to aid comparison. This valuation tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PEs test for "paper capacity" i.e. the relative ability of companies, sectors and regions to originate deals using shares only.
Net debt to EBITDA is calculated using estimates from FactSet, again by each company in our 1,000, and is a respected ratio that 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.
By comparing both sets of forward looking ratios, with sectors and regions weighted by market capitalization, 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 independent, investment banking advisory services internationally and comprise more than 2,300 investment banking advisory professionals operating in 62 countries. KPMG 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.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 144 countries and have 137,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is legally distinct and a separate entity, and describes itself as such.
KPMG International performs no professional services for clients nor, concomitantly, generates any revenue.
Dealogic is a leading supplier of relationship management, transaction execution and information systems for the investment banking industry. With offices throughout the world, Dealogic offers coverage of global capital markets and corporate finance activity.
About KPMG China
KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong SAR and Macau SAR, with more than 8,500 professionals.
In 1992, KPMG became the first international accounting firm to be granted a joint venture licence in China, and our Hong Kong SAR operations have been established for over 60 years since 1945. This early commitment to the China market, together with our unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in our appointment by some of the China's most prestigious companies.
As China businesses join the global economy and international companies seek to enter the China market, KPMG's blend of international experience and local knowledge makes us well-positioned to serve our clients in this increasingly complex, but exciting market.
Our single management structure for all our China offices allows efficient and rapid allocation of experienced professionals wherever the client is located in China. The flexibility of this single structure allows us to effectively serve companies across China, and we have many projects where professionals from different offices work together on an work engagement under the supervision of a single nominated client partner, who has operational control of all resources.
Our business in China has established industry groups, enabling targeted, industry-specific experience and solutions to be delivered where needed. For our clients, this focus on industry and country specific knowledge means we can deliver exceptional people with an intimate knowledge of your specific business issues, as well as an overriding commitment to strive for the highest quality services.