Analysts expect the world’s largest corporates to show a greater appetite for M&A transactions in 2014 than they did last year, according to KPMG International’s latest Global M&A Predictor.
Predicted forward P/E ratios, a measure of confidence or appetite, were 16 percent higher in December 2013 than they were 12 months earlier and an increase of 17 percent since June. The rise in confidence was mirrored by an increase in share prices, with market capitalisations up 19 percent over the year. However, the growing confidence is not reflected in transaction volumes or values, which continue to struggle.
Capacity continues to increase
As well as an increase in confidence, analysts also expect corporates to have more capacity to undertake transactions during 2014 than previously, due to falling Net Debt to EBITDA ratios. These are expected to decline by 12 percent over the next 12 months, giving corporates more financial headroom for deal-making.
The US Federal Reserve’s end of year tapering of quantitative easing could have a temporary dampening effect, but overall the combination of growing capacity and rising confidence suggests a potential rise in transaction levels in 2014, as restless investors start to turn up the M&A pressure after several years of inactivity.
“The growing appetite for deals and an increase in pressure to transact are two sides of the same coin,” said Tom Franks, Global Head of Corporate Finance at KPMG International and a partner with the UK firm. “Investors have been patient over the last three or four years; but as deal capacity continues to rise and global markets maintain some stability, the pressure on cash-rich corporates to start deal-making again is going to intensify.”
Share prices benefit from rising confidence
The pressure to transact is also reflected in the performance of share prices. Market capitalisations rose an impressive 19 percent between December 2012 and December 2013. This suggests that share prices are being buoyed by the increasing growth expectations of investors; expectations which are unlikely to be met from organic growth alone.
Analysts’ positive expectations were apparent right across the globe. In Europe and North America, forward P/E ratio expectations sky-rocketed 19 and 22 percent respectively between December 2012 and December 2013, along with Africa and the Middle East which saw an increase of 19 percent since the first half of the year.
Deal volumes still fragile
Although overall market sentiment is undoubtedly positive, transaction levels have still not caught up. From 30,945 deals in January 2013, the total number of completed deals fell to 27,194 in December, a drop of over 12 percent. Deal values also declined, falling around 7 percent over the same period.
“Steadily increasing corporate confidence is still not being reflected in global transaction levels, and deal markets are continuing to struggle. However, this is against a background of a red hot IPO market in the UK and the US, and it will be interesting to see how the M&A situation changes during 2014,” said Franks.
Healthcare leads sectors
Healthcare has consistently been one of the strongest sectors for analyst predictions in recent times, and these positive expectations show no signs of diminishing. Predicted forward P/E ratios for Healthcare companies rose 24 percent over the year, followed by Industrials (23 percent) and Technology (22 percent).
In terms of capacity, Healthcare again leads the way with a predicted rise in capacity of 45 percent over the next 12 months, as measured by the forecast net debt to EBITDA ratios.