Balance sheets healthier but M&A confidence down

A lack of confidence in the economy has continued to hinder merger and acquisition (M&A) activity, despite British companies having a strong cash position, research finds.

According to the latest KPMG Global M&A Predictor, forecast net debt compared to EBITDA (earnings before interest, tax, depreciation and amortisation) is set to tumble by 30 per cent over the next year. Analysts also predict net debt will drop by 21 per cent, showing extensive deleveraging, and implying that the capacity to conduct M&A is improving strongly among the large, publicly quoted companies examined in the research.

But forward price-earnings ratios, which give an indication of confidence and appetite to complete deals, are down 14 per cent in the past year, which demonstrates a ‘diminished deal-making appetite’, the report states.

David Simpson, global head of M&A at KPMG, says the UK market is at a ‘strange impasse’ where companies have been paying down substantial levels of debt, compared with their earnings. He adds that the trend is set to continue this year but reduced price to earnings ratios show that the market is ‘unconfident’.  

Simpson comments, ‘One thing is certain, management teams are going to have to work hard this year to get investors on side and support their M&A ambitions.  With the market cap of the UK companies in our survey up 8 per cent in the last year, it’s a communications battle some management teams will feel confident they can win.’

In other report predictions: forecast net debt to EBITDA ratios are set to fall by 18 per in the next year for companies globally but are set to drop 30 per cent for UK companies; global net debt is predicted to fall by 10 per cent, compared with more than double for the UK at 21 per cent; and, price-earnings ratios are down 11 per cent globally but in the UK they have fallen 14 per cent.

Internationally, global M&A appetite is highest within the telecommunications sector, buoyed by innovation from technology companies, particularly in mobile data and cloud computing, which are ‘positioned to deliver strong growth’, the report finds.