Appetite for M&A deals climbs up in India and globally after strong H2- KPMG

The world's largest corporates are expected to show a greater appetite for M&A deals in 2014 compared to 12 months ago, according to KPMG International latest Global M&A Predictor. Predicted forward P/E ratios (the measure of corporate appetite) in December 2013 were 16 percent higher than in December 2012. This reflects the last half of the year, which saw a 17 percent increase in forward P/E between June and December 2013. This was compared to a 1 percent fall in the previous 6 months, after concerns over the anticipated mid-year tapering of quantitative easing in the US. The increase in appetite is matched by an anticipated increase of capacity of 12 percent over the next year.

Like many other countries, Brazil, Russia, India and China all saw fall in predicted forward P/E ratios over the first 6 months of the year, only for them to come back to varying degrees during the latter half. For the second half of the year, analyst predictions for forward P/E ratios in Brazil and China were 15 percent higher than 6 months earlier, in Russia, they were 18 percent up, while in India, they were 8% up over the same period.

The ability of the largest corporates to transact, measured by net debt to EBITDA ratios, is also expected to continue its upward trajectory of the last few years. Analysts expect the overall net debt to EBITDA ratio to fall 12 percent over the next 12 months, thereby increasing capacity, as companies continue to build cash reserves. The US Federal Reserve's end of year tapering of quantitative easing could have a dampening effect in 2014, but overall the ongoing increase in capacity, together with growing confidence levels, points to a potential rise in transaction levels as investors start pushing for a return to deal-making after the inactivity of recent years.

The pressure to transact is also reflected in the performance of share prices. Market capitalizations rose 19 percent between December 2012 and December 2013, suggesting that share prices are being buoyed by the increasing growth expectations of investors.

According to Tom Franks, Global Head of Corporate Finance at KPMG, the growing appetite for deals and an increase in pressure to transact are two sides of the same coin. Investors have been patient over the last 3 or 4 years. But as deal capacity continues to rise and global markets maintain some stability, the pressure on cash rich corporates to start deal-making again is going to intensify.

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