M&As fall victim to sombre look

Date: 13-07-2008
Source: Financial Times

The global deal environment is set to deteriorate over the next 12 months as the grim economic outlook erodes the confidence of companies and their balance sheets weaken, KPMG has warned.

KPMG's Global M&A Predictor - an index that looks at 1,000 companies and the ratio of their share price to earnings - is forecasting a decrease in both appetite and capacity of companies to make deals. The warning shows a change in sentiment of companies that had hoped the credit crunch would provide opportunities to make acquisitions at cheaper valuations.

It comes in spite of a pick-up in activity including Dow Chemical's $18.8bn acquisition of Rohm & Haas; InBev's negotiations with Anheuser-Busch; Schaeffler's attempt at acquiring Continental of Germany and FedEx's negotiations to buy TNT of The Netherlands.

All regions, bar Latin America, have shown a fall in their respective forward P/E ratios coupled with a deterioration in the ratio of net debt to earnings before interest, tax, depreciation and amortisation.

"We had hoped the gradual decline seen earlier this year could be maintained, but now all indicators are pointing at a marked fall across all regions and sectors," said Stephen Barrett, global chair of KPMG's corporate finance practice. "While we don't think M&A is falling out of bed, there will definitely be a material decline."

Companies across the world are trading at a forward PE of 15.3 times forward earnings, compared to a multiple of 17 six months ago, KPMG found. At the same time, global balance sheets appear to be deteriorating, with the forecast net debt to ebitda ratio moving from 0.81 times to 0.93 times

George Maddison, managing director of the UK investment banking team at Credit Suisse, said many corporations had put fresh banking facilities in place during 2007. "However, the operating sides of their businesses are increasingly under pressure, which always makes M&A deals more difficult."

The value of mergers and acquisitions in the first half sank by nearly a third from the same period last year to $1,860bn, according to data from Dealogic.

Carlo Calabria, head of European M&A at Merrill Lynch, said he did not expect a further material decline: "CEOs remain in control of their corporate agenda and will continue to pursue strategic acquisitions."


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