KPMG Says Global M&A to Fall in 2009, Late Year Pickup Possible

2007 was clearly the peak of global M&A, with private equity and strategic buyers in full force, strong capital markets and supportive debt structures freely offered by commercial banks. But what a difference a year makes!

KPMG Corporate Finance's Global M&A Predictor expects that 2009 will continue to have a decrease in global mergers and acquisitions (M&A) activity, but with some activity returning in late 2009 as liquidity improves and attractive value becomes recognized in certain sectors.

The latest Predictor, which is really a forward-looking survey of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective Price Earnings ratios, shows a large fall in 12-month forward corporate valuations, which leads to a decreased deal appetite. Consider that global deals’ multiples were down 22.2% percent from 15.3x in May 2008 to 11.9x in November 2008. Looking forward, forecast Net debt to EBITDA ratios have decreased from 0.93 times to 1.06 times, a 13.5% deterioration, indicating that companies have a decreasing capacity to enact M&A deals.

KPMG’s Predictor has been fairly good in calling deal volume. In June 2007, KPMG called the top of the M&A market, after which there was significant decline in the average value in deals. In January 2008, the Predictor indicated lowered appetite for deals and a deterioration in deal capacity. But by late 2009, things change with deal appetite improving as cash-rich investors begin to like deep value in the market; and this may be one of the positive indicators to indicate an upturn in the broader economy.

For the first time, the Predictor indicates a declining valuation trend in all regions of the world, showing a global decline in M&A activity. Africa and Middle East suffered the most, followed by Latin America, and North America. Drops in Europe and Asia Pacific were relatively moderate.

Balance sheets in Latin America and Africa and the Middle East actually improved, and Europe fell. Asia Pacific deteriorated the most, showing this region is being hurt the most. There appears more hope in North America and Latin America, indicating companies may do deals opportunistically. Expectations for Europe are modest.

In terms of sectors, the Predictor has shown a decline in forward PE valuation across all sectors, with Technology, Basic Materials and Industrials, expectedly leading the list.

According to Stephen Barrett, Corporate Finance International Chairman at KPMG, “Findings from our latest Predictor confirm our view that 2009 will be a very subdued year for M&A activity. We expect global deal volumes to continue to fall through to Q3 and, with less liquidity in the market and reduced debt market liquidity, appetite and capacity for doing deals will continue to decline. However, our detailed analysis of the results of KPMG’s Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year….