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Companies can afford to spend on acquisitions, but they lack the stomach to do so, says a KPMG report.
Vincent Ryan, CFO.com | US
July 19, 2012
Despite having room on their balance sheets, few companies will have the appetite for mergers and acquisitions the rest of this year, according to KPMG's "M&A Predictor" report, released Thursday. KPMG says the global appetite for M&A deals will continue to be suppressed by a cloudy macroeconomic outlook, events in Europe, and the slowdown in the Chinese economy.
Currently, on a trailing 12-month basis, the number of M&A deals globally is down 12% and deal values are off 18%, says KPMG. And M&A activity during the rest of 2012 is expected to continue to be sluggish, at least according to KPMG's model.
The predictor uses forward price-to-earnings (P/E) ratios to determine the level of future expected appetite for M&A. And those ratios are showing that the markets are not confident about asset values. Although profit expectations are up globally, forward P/E ratios have fallen 3% globally since December 2011, the last time KPMG released the predictor. In the past 12 months, forward P/Es have dropped 5%.
"Market confidence has not kept pace with the expected short-term increase in profits, largely due to continuing uncertainty over the bigger economic picture," KPMG stated in its report.
In the United States, appetite for deals is actually healthier than elsewhere, with forward P/E ratios down just 2%. But in other regions, the pullback in confidence is much more severe: European companies have seen a 17% drop in forward P/E ratios; Asia-Pacific companies (excluding Japan), 28%; Japanese companies, 13%; and Chinese companies, 8%. The only major market with an increase in appetite is the United Kingdom, with a 1% increase in forward P/E ratios.
"Confidence or appetite to do deals looks incredibly negative in some countries," said David Simpson, global head of M&A at KPMG, in a press release accompanying the report.
While the hunger for M&A deals is diminished, many companies will have the capacity to finance transactions in the coming months, according to the KPMG study. Using net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) as a gauge of whether companies have the ability to fund future deals, KPMG forecasts that companies' balance sheets will have room to accommodate acquisitions.
During the next year, the overall net debt of public companies will drop 12% on a global basis, and net-debt-to-EBITDA will fall 19%. Net debt ratios in Europe will improve less (17%) than the global average, but the deal-funding capacity of companies in the Asia-Pacific region (a 28% fall) and North America (a 25% fall) will increase more than the average.
"The collapse in deal activity is certainly not due to a lack of large-company capacity," KPMG stated in the report.
Dividing M&A appetite by sector, the global-energy and consumer-discretionary industries have the smallest appetite for deals, with forward P/E ratios declining 10% and 9%, respectively. The strongest appetite for deals is in health care, says KPMG, with forward P/E ratios up 4%.
While KPMG's assessment is that M&A activity will not pick up during 2012, on Wednesday PricewaterhouseCoopers released its own study that said deal making will revive in the second half of the year.
In the second quarter, PwC points out, M&A deal volumes hit $218 billion, with 1,891 transactions completed. Both numbers represent an uptick compared with the first quarter. But the entire first half of 2012 still lagged 2011, with the number of transactions off 16% and total disclosed deal values down 41%.