KPMG Corporate Finance’s Global M&A Predictor forecasts a continued fall in global merger and acquisition activity (M&A), into the second half of 2008. Having accurately called the top of the M&A market a year ago, the latest version of KPMG’s Global M&A Predictor provides compelling evidence of a decreasing appetite for deals and deterioration in the capacity to do deals globally.

Stephen Barrett, Global Chair, KPMG’s Corporate Finance practice, commented: “Findings from our latest Predictor reveal strong evidence that market conditions for M&A transactions will continue to deteriorate. We had hoped that the gradual decline seen earlier this year could be maintained but now all indicators are pointing at a marked fall in the market, across all regions and sectors.”

Forming a comparative view between the Global and Indian M&A scene, Rohit Kapur, Corporate Finance Head, KPMG India shared his observation saying, “Despite the global slowdown in deal activity, India is still seeing a steady flow of transactions, however the sentiment is changing from aggressive growth initiatives to consolidation and rationalization of business strategies”.

Commenting on the findings by the KPMG Global M&A predictor, Mr Barrett says, “Last year we correctly called the top of the global M&A market, with a gradual plateau in activity offset by continued growth in Asia Pacific. Now, however, our latest forward-looking statistics suggest that the next 12 months will become increasingly difficult for transactions right across the globe. Although six months ago forward PE ratios in Europe and the U.S. were down marginally, the Asia Pacific region saw ratios move forward strongly from 17.0x to 19.0x. This time, all regions, bar Latin America (which has risen by 6.3 percent), have shown a fall in their respective forward PE ratios with the most rapid fall being for Africa/Middle East (down 13.9 percent), followed by Europe (down 12.3 percent), Asia Pacific (down 10.7 percent) and North America (down 8.7 percent). At the same time, whilst balance sheet capacity remains robust, the Predictor is showing deterioration in net debt to EBITDA ratios across the board.”

KPMG GLOBAL M&A PREDICTOR ANALYSIS

The latest Predictor - a forward looking index of 1,000 leading companies’ estimated net debt to EBITDA ratios and forward Price Earnings ratios – sees the largest fall in global forward PE ratios recorded to date. This decrease in corporate valuations (down globally 10.3 percent from 17.0x to 15.3x in the six months to the end of May 2008), in KPMG’s view, indicates a lessening appetite to execute deals. In addition, net debt to EBITDA ratios have moved from 0.81 times to 0.93 times – indicating that the capacity to drive deals through debt may soon be negatively impacted and deteriorate.

The Predictor therefore suggests that 2008 deal levels and values for the remainder of the year should continue to fall away, with corporate balance sheets also weakening somewhat.

Latest actual M&A activity, according to data provider Dealogic (see Figure 2), supports the findings of KPMG’s Predictor, published six months ago. According to Dealogic, the five months up to the end of May 2008 saw 15,968 deals globally at a value of US$1,421.3 billion – in marked contrast to the 19,784 deals recorded in the second half of 2007 - at a value of US$ 2,161.3 billion, with Asia Pacific being the only region showing resilience.

Forecast M&A activity by world region

The Predictor indicates a declining valuation trend in all regions with the exception of Latin America (see Figure 1) which saw its PE rise from 15.2x in December 2007 to 16.1x in June 2008 (i.e. up 6.3 percent). The region which had the biggest drop in valuation was Africa and Middle East (PEs down from 15.5x to 13.3x) in contrast with the rise that was witnessed in the last Predictor. Europe had the second largest fall (12.4 percent) and Europe and North America continue to show valuation trend deterioration (PEs in these regions have fallen from 15.5x to 13.5x and from 17.4 to 15.9x, respectively), all pointing to weakening M&A activity. For Asia Pacific, which had seen its PE ratio increase by 11.8 percent in December 2007, the tide appears to be turning with the region recording a 10.7 percent drop in forward valuations from 19.0x to 17.0x.

At the same time, balance sheets also appear to be deteriorating (see Figure 1) with the global forecast Net Debt to EBITDA ratio moving from 0.81 times to 0.93 times. Europe now has the highest regional ratio of 0.97 times, a deterioration of 16.2 percent and overtaking North America which now stands at 0.94 times (previously 0.86 times). Latin America declined by 16.1 percent to 0.95 times. Asia Pacific which has previously seen an improvement witnessed a decline by 22.7 percent in the current Predictor at 0.89 times. The region which showed the greatest decline was Africa and Middle East though the ratio of 0.51 times is the most modest of all regions. This expectation of a tightening of balance sheet capacity, together with falling valuations points to a likelihood of weakening M&A trends globally.

The previous Predictor correctly indicated that a run of deal activity in Asia Pacific would reduce the severity of the overall global slowdown. Now six months on, the deterioration over the last six months in both the forward PE valuations and Net Debt/EBITDA ratios for companies across the Asia Pacific region suggests that M&A activity will be more subdued during the remainder of calendar 2008.

European deal activity has definitely gone ‘off the boil’ with Price to Earning multiples down a worrying 12.4 percent. While Europe may still have the potential for mega deals, which could skew average deal values overall, the likelihood is that we will see a worsening of the situation, with corporate balance sheets also expected to weaken, down 16.2 percent, by comparison to other regions. There is a stark contrast in the Americas with North American PE ratios down 8.7 percent and Latin America up 6.3 percent. However, balance sheets have deteriorated overall. Prospects of a speedy recovery look decidedly weak.

Forecast M&A Activity by Global Sector

The Predictor has shown a decline in forward PE valuation across all sectors, with Telecommunications (16.9x to 14.1x), Industrials (17.6x to 15.5x) and Utilities (19.8x to 17.7x) registering the most significant deterioration. Consistent with the previous Predictor, Utilities, Consumers Goods (17.6x to 16.2x) Consumer Services (18.1x to 17.0x) Technology (20.2x to 18.4x) and Health Care (16.8x to 15.5x) all continued to decline.

Utilities and Industrials continue to maintain the highest debt ratios, with a net debt to EBITDA of 2.45 times and 2.12 times respectively. The Technology sector continues to show net cash which reflects traditional balance sheet structure but Health Care has moved from a net cash position to one of net debt.

Only two sectors have shown improvement in the Net Debt to EBITDA ratio; Oil & Gas strengthened from 0.38 times to 0.34 times in line upward revisions in oil price estimates, whilst Telecom improved from 1.10 times to 1.07 times.

Overall, Basic Materials Latin America (PE’s 11.4x to 14.2x to Net Debt/EBITDA from 0.30 times to 0.28 times), Utilities Latin America (PE’s 17.0x to 18.3x/marginal improvement in net debt to EBITDA) and Consumer Services Asia Pacific (PE’s 20.5x to 20.8x and Net Debt to EBITDA from 0.63 times to 0.56 times) were the only three sector/regions which have shown improvement in both valuation and balance sheet capacity in the last 6 months, suggesting that appetite and capacity remains positive.

The biggest drop in forward PE was witnessed by Basic Materials Africa & Middle East (18.1x to 13.4x) followed by Telecommunications Europe (15.1x to 11.9x) and Telecommunications Asia Pacific (21.1x to 17.0x).

The sector/regions with the greatest balance sheet deterioration were Consumer Goods Latin America (0.48 times to 0.87 times), Consumer Goods Europe (0.47 times to 0.84 times), Basic Materials Europe (0.38 times to 0.63 times).

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Media enquiries:

Mr Subir Moitra, Corporate Communications, KPMG in India, email: smoitra@kpmg.com

Notes to Editors: KPMG’s Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.

KPMG’s Global 1,000 comprises 1,000 of the largest companies in the world by market capitalization, with a representative weighting of countries and sectors, to help ensure appropriate inclusion. A Global 1,000 panel of KPMG firms’ professionals sits every half-year and reviews the constituents of the index to seek to ensure that it remains reflective of global changes in regional and sector weightings.

The data is sourced from FactSet, the corporate earnings estimates data provider. KPMG calculates 12 months forward PE ratios (expressed as a multiple) for each qualifying company of the 1,000, and aggregates these into regions and sectors to aid comparison. This valuation tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PE’s test for “paper capacity” i.e. the relative ability of companies, sectors and regions to originate deals using shares only.

Net debt to EBITDA is calculated using estimates from FactSet, again by each company in our 1,000, and is a respected ratio that indicates capital structure and financial gearing. This ratio tests for “debt capacity” – that is, the relative ability of companies, sectors and regions to originate deals using debt only.

By comparing both sets of forward looking ratios, with sectors and regions weighted by market capitalization, KPMG’s Global M&A Predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. It also attempts to compare and contrast sector regions to highlight possible areas of deal flow. (Note:Net debt/EBITDA ratio calculations are not relevant for financial services and property sectors. These sectors have therefore been excluded from this analysis.)

KPMG’s Corporate Finance practices provide a range of independent, investment banking advisory services internationally and comprise more than 2,000 investment banking advisory professionals operating in 62 countries. KPMG’s Corporate Finance provides strategic advisory and deal management services covering: acquisitions and disposals; mergers and takeovers; valuations and fairness opinions; structured and leveraged financing; private equity strategies; initial and secondary public offerings; joint ventures and transaction alliances.

About KPMG:

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 145 countries and have 123,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is legally distinct and a separate entity, and describes itself as such.

KPMG International performs no professional services for clients nor, concomitantly, generates any revenue.

Dealogic is a leading supplier of relationship management, transaction execution and information systems for the investment banking industry. With offices throughout the world, Dealogic offers coverage of global capital markets and corporate finance activity.