M&A levels to stay strong in 2016

The world’s largest businesses are expected to show an increasing appetite for mergers and acquisition (M&A) transactions over the next 12 months, said the latest edition of KPMG’s International Global M&A Predictor.

KPMG’s Global M&A Predictor, is a forward-looking tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions. The Predictor looks at the appetite and capacity for M&A deals by tracking and projecting important indicators 12 months forward.

The appetite to do deals is predicted to rise by 4 percent over the next 12 months, as indicated by predicted forward P/E ratios (our measure of corporate appetite or confidence). The capacity of corporates to fund M&A growth, meanwhile, is expected to rise by 13 percent over the same period, measured by net debt to EBITDA ratios (our measure of capacity), as companies continue to pay down debt and bolster their cash reserves.

With the Chinese economy cooling down, the US starting to raise interest rates and oil prices depressing the economies of oil exporting countries, uncertainty has increased significantly going into 2016.

“We expect strong transactional activity in many western economies in 2016 with healthy balance sheets, profit levels and strong liquidity in the debt markets among the highlights,” said Leif Zierz, KPMG International Global Head of Deal Advisory. “Increased sector convergence and ongoing digitalization make a compelling case for future strategic adjustments. However, emerging market economies are expected to remain challenging.”

The positive picture comes despite some uncertain economic indicators, such as a predicted fall in net profits of 7 percent globally. It appears that analysts are pricing this decline into their predictions, however, with market capitalizations only expected to see a 3 percent reduction.

Europe is expected to be one of the strongest performers. The 10 percent increase in appetite seen here is more than double the global average. In Asia Pacific (Other) and Asia Pacific (Japan) the figures area a more modest 6 percent and 4 percent respectively. In North America, the positive environment for M&A activity in 2015 is expected to continue, with analysts expecting confidence levels to remain unchanged.

The total value of all announced transactions worldwide rose by 31 percent in value terms, from $2.828trillion to $3.709trillion. This diverges significantly from the total value of all completed transactions worldwide, which declined by 40 percent during 2015 (from $2.513trillion to $1.510trillion).