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Appetite for M&As set to grow

Tuesday 19th January 2010

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Appetite for mergers and acquisitions may return this year as the global economy emerges from the worst slump since WWII, helping stoke valuations as companies trim debt and lift earnings, according to KPMG.

The KPMG Global M&A Predictor indicates that corporates will have an increased purchasing appetite this year as they are now able to place more confidence in their own and targets’ forecasts. The predictor is calculated against 1,000 of the world’s largest companies, excluding financial services and property sectors. It forecasts corporate deal-making appetite and capacity by measuring changes in PE and debt-to-earnings ratios.

Compared to a year ago PE ratios are now 7% higher at 14.0 times for 2010, versus 13.1 times for 2009. Net debt-to-EBITDA ratios are expected to decline by 18% from 1.5 times to 1.2 times, according to the firm’s report.

“Most major M&A players took a wait and see approach in 2009 due to a lack of confidence in forecast earnings,” said Tony McNaught, corporate finance partner at KPMG NZ. “But these recent results bear all the hallmarks of a market that has been reset for a slow but steady growth.”

M&A activity tumbled more than 50% worldwide last year, versus 2008, the largest year-on-year decline in recent history. The global financial crisis and ensuing economic slump froze credit markets and dried up debt funding for deals. Among local deals strangled by the credit squeeze was PGG Wrightson’s failed proposal to acquire 50% of meat processor Silver Fern Farms for $220 million in late 2008.

KPMG’s predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. The global accounting firm’s PE test reflects a ‘paper appetite’, that is the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only.

“The predictor shows that corporate appetite and capacity are expected to increase – so we may confidently expect that corporate M&A will lead the way in 2010,” McNaught said.

The measure is principally focused on corporate activity. KPMG notes that thought there has been some resurgence in private equity deals, that sector will continue to be hampered by a shortage of access to debt funding, putting it as a comparative disadvantage to corporates.

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