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 global appetite to do deals is predicted to rise by an average of 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.
This increase in appetite is in spite of the Chinese economy cooling down, the US starting to raise interest rates and oil prices depressing the economies of oil exporting countries.
Capacity to invest continues to climb
Among Singapore-based companies, we see an expected 15 percent increase in the capacity to fund M&A growth.
"Transactional activity is expected to remain relatively strong due to relatively low cost of financing and the hunger for inorganic growth in the current weak economy," said Benjamin Ong, Head of Mergers & Acquisitions and Capital Advisory, KPMG in Singapore.
"Singapore companies have maintained healthy balance sheets and have the capability to finance M&A activity to boost market share and keep up with competition in the increasingly consolidated marketplace."
Analysts are anticipating that the growth in capacity of corporates to undertake M&A transactions is based largely on the paring down of debt over the past few years. Asia Pacific corporations (excluding Japan) exceed the other regions at 19 percent growth in capacity to invest, followed closely by Africa and the Middle East at 18 percent.
The expected growth in capacity to invest for the United States is 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.
From a sectorial perspective, we see exceptional growth of investment capacity in Consumer Discretionary and Consumer Staples with expected increases of 155 and 49 percent respectively for Asia Pacific. Globally, Technology is the star performer with an expected increase of 90 percent, as tech companies continue to increase their cash stockpiles.