Tensions Between Management and Investors Set to Characterise Global M&A in 2011

A recovery in global M&A activity is forecast for 2011 as deal-making capacity continues to improve against a background of investor caution.


According to the latest KPMG International Global M&A Predictor, forecast net debt to EBITDA ratios are set to tumble 18 percent over the next year, suggesting that M&A war-chests are now healthily stocked. Net debt globally will fall by 10 percent, showing extensive deleveraging, meaning that M&A capacity continues to improve strongly.


However, it is the forward PE ratios within the Predictor which will likely attract most attention – as an indicator of deal-making appetite.


Globally, forward PE ratios are 11 percent down over the last twelve months (down from 14.4x to 12.8x).


Typically, this would suggest diminished deal-making appetite yet the decline should be viewed in the context of rising markets (up 12%) and even faster earnings expectations (up 26%), both of which are historic leading indicators of greater M&A actvity.


Combine this with evidence that 2010 global deal activity rose to a level above that of 2005 and it leads KPMG to sound a positive note about predicted deal activity, as explained by David Simpson, Global Head of M&A and a partner in the UK firm: "I believe that what we’re seeing played out in the latest Predictor is the struggle between more confident managements and investors which still need some convincing."


According to Simpson, the demand side of 2010's deal-making recovery has been driven by a number of factors including the steady build-up of cash by larger companies and the need to access new markets and technologies. This will be enhanced by the supply side in 2011, driven by a deal overhang from a variety of investors which need to rebalance their portfolios. "We also expect to see continued growth in private equity driven M&A - on both the buy and sell sides - and an increased volume of IPOs for similar reasons."


Simpson adds that the struggle between managements and investors shown is very much mirrored at the individual company level. "What you tend to see here is management teams keen to pursue growth ambitions, in what were – until recently – low inflationary environments, coming up against investors who cannot quite share their optimism. The latter thus remain cautious about proposed management team spending."


At an industry level, M&A appetite is highest within the telecommunications sector where forward PE ratios are up by two percent, thanks to the increase in markets (nine percent) outstripping expected earnings (eight percent). It is the only sector whose PE is in positive territory, although Non-Cyclical Consumer Goods is not far behind at zero.


On the net debt to EBITDA ratio, the technology sector has long been the superstar of the Predictor, with its ratio of-1.1x representing a net cash position. However, an improvement in the Healthcare sector ratio (down from 0.3x to 0.1x) means that it may soon be the second sector to move to a net cash position.





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