UK and US ‘least Worst’ Global M&a Markets in 2012
India and Germany expected to see substantial slow down in M&A this year
KPMG International’s latest Global M&A Predictor shows that the first six months of 2012, and beyond, are likely to be tough for M&A. The gradual year-on-year increase in confidence since the nadir of the downturn in 2009 is over, in the face of increasing concerns about the economy, not least in the Eurozone.
Forward price/earnings (PE) ratios have fallen by 5 percent since June 2011 and 14 percent since January 2011. Although this is a slower rate of decline than in the previous six months, it suggests the gradual improvement in M&A over the past two years is coming to a halt.
David Simpson, Head of Global M&A at KPMG and a partner in the UK firm, comments: “The first half of 2012 – and most probably the rest of the year – will be a hard slog for dealmakers around the world. Serious economic wobbles, not least in the Eurozone, have dampened corporate appetite for deals.
“However, we are not predicting a cliff-style drop: deal activity is more than possible with corporate cash, private equity coffers and availability of target companies plentiful. The real test will be whether companies have the stomach to pursue deals.”
The Predictor shows that the fall in confidence contrasts with a rise in the capacity of companies to embark on M&A activity. With net debt forecast to drop 12 percent globally and net debt to EBITDA ratios expected to be down 18 percent, balance sheets appear in good shape. This shows that there is the capacity to undertake transactions, but it is not matched by the appetite. Instead, companies are prioritizing debt reduction and balance sheet management.
All sectors expect net profits to fall
Simpson went on to say, “Across all sectors, year ahead net profit expectations have dropped since our survey last summer. This is the first time in two years that this has happened , with the pinch being felt especially in basic materials, industrials, utilities and consumer discretionary.”
Against this backdrop, confidence in many industries is predictably muted, with forward P/E ratios particularly down in basic materials (14 percent down) and industrials (9 percent down). Some sectors are bearing up better than others, however: consumer staples actually registers a 2 percent forward P/E ratio increase.
Taking a longer term view, signs are more positive for healthcare. Despite registering a 3 percent forward P/E ratio decrease between June and December 2011, this is on the back of two successive six-month increases, leaving the industry in an overall healthier situation than it was 12 months ago.
North America and UK holding up better than other regions
Simpson went on to say: “There are big variations between some of the world’s major economies with India and Germany showing confidence drops of 19 and 18 percent respectively over the last six months compared with the UK with only a 2 percent drop and the US which remains flat. The US saw a drop of just 3 percent in market capitalization over the last six months, compared with a 10 percent drop globally.
“It may seem surprising that the reliably solid Germany and high growth market of India are predicted to slow to such a great extent but this demonstrates just how volatile markets are at the moment. Under the current economic circumstances, the predicted UK and US markets look ‘least worst’ of the major global M&A markets.”