A severe loss of confidence has postponed the anticipated reawakening of the M&A market, claims KPMG International’s latest Global M&A Predictor.
Although the latest Predictor shows forecast net debt to EBITDA ratios coming down by 20% - indicating increased deal-making capacity - forward PE ratios have tumbled by the exact same amount, suggesting that deal-making appetite is under severe pressure.
The previous Predictor, released in January, showed forward PE ratios up by seven percent and net debt ratios forecast to fall by 18 percent. This indicated that the M&A market would once again be open for business.
However, it is now clear that confidence has ebbed away during the past six months and prospective corporate purchasers have yet to re-open their war-chests.
From a statistical point of view, the problem arises from six months of flat or falling market prices. Although analysts raised their forecasts of projected 2010 earnings by 18% between December 2009 and June 2010, prices fell by five percent globally. This has resulted in a diminished forward PE ratio of 11.9x - down 20% from the 14.8x predicted in December.
Africa and the Middle East was the only region not to suffer from falling stock market values while North America’s were flat. All other regions registered a decline, with Europe suffering the most at -11%.
“On a more positive note, increased earnings expectations and reductions in forecast net debt ratios suggest that the foundations for future M&A activity are being laid,” David Simpson, Head of Global M&A at KPMG.
Global deal values on a trailing twelve months basis have bottomed out during the course of this year although deal numbers have continued to fall. Simpson points out that the reawakening of the M&A market for larger deals will have to be led by corporates rather than the Private Equity (PE) community. The problem for the latter is that as long as the banks remain preoccupied with their current problem loans and unsure about their own future capital requirements, debt for large LBOs will be very scarce.
Smaller, mid-market deals by PE players are however already leading the way in some markets, with PE houses under pressure to spend existing funds and to realise quality investments before their next round of fund-raising.
“Within the modest deal activity we are currently seeing, there is an unusually high percentage of quality assets. When these are within the reach of the middle-market PE players (i.e. with values of below US$750m or so), they are attracting very high prices. This reflects their safety and their rarity in an uncertain environment. The lesser quality assets are simply less likely to be put up for sale. The owners of these companies are not happy with the prices on offer for them and low interest rates mean that they are not under pressure to sell,” concludes Simpson.