Deal appetite among the world’s largest companies is higher than it was a year ago, with forward P/E ratios – a measure of confidence, or appetite – up 14 percent from June 2012, KPMG’s latest M&A Predictor shows. However, forward P/E ratios over the past six months have remained rather stagnant since the start of the calendar year.
“Despite several years of forecast growth in capacity, market confidence is clearly still hampered by macroeconomic factors affecting corporates in Europe and the United States," says Vishal Sharma, KPMG’s Head of M&A, for the Asia Pacific region. "These also have a knock-on effect in Asia, particularly Singapore.”
Sharma adds that the anxiety around global appetite in the past months is reflected in most regions. Nonetheless, confidence in the M&A market is still higher than a year ago in all sectors.
The M&A predictor, which is produced twice a year, helps companies forecast global trends in mergers and acquisitions. Established in 2007, the predictor uses data from 1,000 of the largest companies in the world by market capitalisation.
Despite the apparent fragility in appetite, the capacity to transact – as measured by forecast net debt to EBITDA ratios – is set to continue improving, as companies pay down debt. There is an expected reduction of 13 percent in global net debt to EBITDA ratios over the coming year. Africa and the Middle East, in particular, are regions expecting to see capacity improve by 34 percent by next year.
“This imbalance between appetite and capacity is likely to lead to continuing tensions between companies and their investors over how to use ‘surplus’ cash.”
Bright spots in data
Among the most outstanding spots in the data is Japan with a 24 percent year-on-year increase in appetite and an expected 8 percent increase in capacity. Similarly, the US continues to outperform the market even in tough times. Forward P/E ratios are four percent higher than six months ago, modest but relatively strong in an uncertain market, and 14 percent up year-on-year.
The US’s capacity to transact is also robust, with an expected improvement of 20 percent over the next year.
Singapore’s year-on-year forward P/E ratios have gone up 13 percent. However, appetite in the past six months has grown at a slower pace, with a decrease in forward P/E ratio of five percent. The country’s capacity to transact is expected to increase five percent over the next year.