M&A activity has ‘reached a plateau’

Business consultancy KPMG’s Global M&A Predictor has said mergers and acquisitions activity has reached a plateau and could even decline in some areas.The Predictor suggests that 2008 deal levels may just about hold steady compared to 2007 but deal values are expected to fall away.

 

 However, with corporate balance sheets generally looking strong, the capacity for “intelligent” deals to be struck remains, it said.

 

The latest Predictor – a forward looking index of 1,000 leading companies’ net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratios and price-to-earnings (P/E) ratios – shows that global forward P/E ratios have now dropped from 17.1x to 17.0x – helping confirm the plateau period that KPMG expects to characterise M&A activity in 2008.

Sharad Bhandari, head of Financial Advisory Services at KPMG in the Lower Gulf, said: “There was no satisfaction in accurately forecasting the top of the market six months ago. However, if there is some consolation to be taken, it is in the fact that – also as predicted – any slowdown will be a fairly gentle, gradual one.

“There are definite winners and losers though; look closely and you see that the forward P/E ratios are down 0.7 and 0.5 in Europe and the US, respectively. It is mainly the Asia-Pacific region – where forward ratios moved forward strongly from 17.0 to 19.0 – which is bolstering the overall numbers.

“This leaves us with a real mixed outlook. Where there is appetite and confidence, there are constraints such as a lack of funds or suitable targets. Where there is cash, there is nervousness, caution and a slight loss of appetite,” Bhandari said in a note.

The Predictor suggests that while the complete second half 2007 figures may eventually compare favourably on deal volumes, deal values look set to be well down in the first half.
 

It is only the presence of a large number of low-value Asia-Pacific deals that kept second-half numbers within touching distance of the first half. Increased M&A activity will be seen in the emerging markets over the next six months, compared to a decrease in levels of activity in the mature regions, it said.

 

“Balance sheets globally remain strong with a net debt to EBITDA ratio of 0.81 times, with Africa/Middle East and Asia Pacific the strongest, indicating that together with increased appetite for deals, these regions also possess the greatest financial capacity for deals. Europe, the US and Latin America have seen no material change in their balance sheet capacities,” the Predictor said.

In the European market, the second half of 2007 witnessed a significant decline in the average value of deals, compared to the first half, which saw record deal values due to several mega deals being completed in the mining, consumer and utility sectors.

  “We expect ongoing market turmoil to continue to limit the capacity to drive deals. Furthermore, our Predictor shows a fall in valuations for the region,” KPMG said. In the Americas, 2007 was another strong year, with deal volumes and values similar to the previous record year in 2006, as evidenced by Dealogic’s recent data.

 

“However, our Predictor’s declining forward-looking North American valuation trend indicates that the region is beginning to lose appetite for deals, perhaps driven by the issues in US sub-prime lending,” KPMG said.

 

“In terms of balance sheet capacity, our analysis shows that North America remains strong, with an improvement in net debt to EBITDA ratios – but clearly the credit crunch could limit the ability to leverage this.”

 

Many of Asia-Pacific’s national economies are buoyant, the consultancy said, enjoying a minimum of five per cent GDP growth.

 

 “We can, therefore, expect the largely untapped potential of regional and sector consolidation to continue to drive healthy corporate deal-flow, particularly in financial and consumer services, and in industrials where we expect several medium-size as well as some mega deals.”

KPMG’s forward P/E valuation analysis of global sectors highlights basic materials, telecoms and industrials as the most positive forward looking valuation trends, suggesting this is where the M&A activity is likely to be over the next six months.

The weakest are consumer services and healthcare. In terms of balance sheet capacity, utilities and industrials have the least capacity, while technology and healthcare continue to show net cash, reflecting traditional balance sheet structures, it said.