M&A appetite and capacity expected to go up
ASEAN region shows strong capacity to fund transactions over the next 12 months

Despite recent turbulence in the markets, analysts expect the world’s largest businesses to show more appetite for M&A transactions and an increasing capacity to fund deals over the next 12 months. This is according to the latest KPMG Global M&A Predictor, a forward-looking tool that helps to forecast worldwide trends in M&A deals.

Globally, predicted forward Price/Earnings (P/E) ratio – a measure of corporate appetite – is expected to increase by 11 percent between June 2015 and June 2016.

The capacity to fund transactions, measured by forecast net debt to earnings before interest, tax, depreciation and amortisation (EBITDA), is expected to improve seven percent over the same period.

This encouraging data has yet to be completely reflected in actual transaction levels. Both completed deal volumes and completed deal values fell between January and June 2015.

Appetite and capacity for ASEAN positive on the whole
Overall, the outlook for ASEAN appetite for deals appears bright. Indonesia and Thailand are expecting a growth in appetite above the global average of 11 percent – the former’s appetite is expected to increase by 16 percent, the latter by 17 percent.

The forward P/E ratios for Malaysia and the Philippines are expected to increase six and 10 percent respectively.

Of the five ASEAN nations analysed, only Singapore registered an expected two percent fall in appetite over the next year.

ASEAN is also expected to have more capacity over the next year. Indonesia’s capacity is expected to grow 12 percent, Malaysia’s 15 percent and the Philippines by 16 percent. Singapore is expected to see an increase of 22 percent in capacity to fund deals. Only Thailand’s growth in capacity - at four percent - fell below the global average.

Despite recent volatility in stock markets and tensions in the global economy, the long-term scenario for ASEAN is expected to be promising. The upcoming formation of the ASEAN Economic Community is also likely to provide an additional boost.

Broadening regional differences
There are some significant regional variations in the expected rise in global corporate appetite for M&A transactions, as political and market uncertainties continue to take a toll in key markets.

China enjoys a huge 71 percent increase in forward P/E ratios between June 2015 and June 2016, accompanied by a 15 percent rise in capacity. Although the forecasts were made before the recent stock market corrections, they suggest a strong underlying confidence in future M&A opportunities.

Compared to the global average of 11 percent, the predicted increase in appetite in North America and Europe, at seven percent and eight percent respectively, is below par, possibly hampered by wider issues such as the continuing squeeze on oil prices and political instabilities in the Eurozone.

Variation can best be seen in the Eurozone, where Germany and Switzerland were able to increase capacity to transact by reducing debt, while France and the UK declined marginally as debt and EBITDA barely budged. In the UK, for example, expectations are in line with the Eurozone at 13 percent, but capacity to transact saw a modest 7 percent drop.

Expectations are brighter for Africa and the Middle East, Latin America and Asia Pacific, which are all expected to see above-average increases in M&A appetite.

Sectors expectations
The challenges in the global energy market that are potentially hampering M&A appetite in some markets are clearly in evidence in the 19 percent fall in market capitalisations 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.

Conversely, the healthcare sector looks more stable, with an 18 percent increase in market capitalizations and a seven percent rise in appetite for M&A. Telecommunications is also looking strong, with an eight percent increase in appetite.

As oil prices continue to experience new multi-year lows and with credit tightening in the sector, acquisition plans of some energy companies might be kept on hold until there is some stability in oil prices. Also to be expected are opportunistic buying, potential forced selling for adversely affected companies and the resetting of capital structures to strengthen balance sheets.
© 2016 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.