Global mergers and acquisitions appetite on the rise, but Middle East market still cautious

DT News Network

Manama 

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Analysts expect the world’s largest businesses to show an increasing appetite for M&A transactions over the next 12 months, while at the same time enjoying more capacity to fund deals, according to the latest edition of KPMG International’s Global M&A Predictor.

Between June 2015 and June 2016 globally, forward P/E ratios (our measure of corporate appetite or confidence) are forecast to increase by 11 percent, while Net debt to EDITDA (our measure of capacity) is predicted to rise by 7 percent over the same period. 

Generally, expectations are bright for Africa and the Middle East, Latin America and Asia Pacific, which are all expected to see above-average increases in M&A appetite. However, according to Ramachandran Narayanan, Partner and Head of Advisory in KPMG Middle East and South Asia (MESA), despite this outlook, the Middle East is expected to adopt a cautious approach given the new low in oil prices that is forcing a number of countries in the region to run budget deficits. He said “The oil price drop, coupled with short-term volatility in global markets, on the back of a feared slowdown in the Chinese economy and continued uncertainty in Europe, will force investors to review their priorities. Governments in the region are expected to take a hard look at unplanned expenditure and streamline spending that will further limit money supply in the local economies.”  He further added that, “The GCC market will continue with its defined spending program on domestic infrastructure and opportunistic acquisitions in select markets and asset classes”.

The encouraging global data does not yet appear to be reflected in actual transaction levels. Both completed deal volumes and completed deal values fell significantly over the six-month period between January and June 2015.

“There has been a pause in the market,” commented Leif Zierz, KPMG International’s Global Head of Deal Advisory. “The continuing impact of low oil prices and political instabilities in some key regions should also not be overlooked. On an individualized basis, we continue to see relatively strong expectation despite a drop in earnings. When we look at the top line numbers, they look unexceptional. There are actually really pockets of strength and great opportunities to be found.”

As well as regional split, the predictor also looks at M&A activity by sector and reveals that the challenges in the global energy market are potentially hampering M&A appetite. This is clearly evidenced by the 19 percent fall in market capitalizations of the largest corporates in the energy sector between June 2014 and June 2015. Profits are also down considerably over the same 12-month period.

“With oil prices continuing to experience new multi-year lows, we can expect many of the acquisition plans of companies in the Energy sector to be delayed or restructured. The return of some stability to oil prices could minimize the downward pressure on deal activity. In the broader market, for those corporates able to increase capacity, primarily through debt reduction, this might be the year to uncover some great value in the market,” comments Phil Isom, Global Head of M&A for KPMG.