Survey predicts M&A activity will return by end of the year

THE number of mergers and acquisitions (M&A) will continue to fall over the coming months but deal activity will slowly return late in the year.

That’s the prediction from KPMG Corporate Finance’s Global M&A Predictor forecast.

Analysis by the business advisory firm of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective price earning ratios revelealed significant deterioration of 13.5% in 12 month forward corporate valuations thereby reducing “deal-doing” ability.

According to Rod Wilkinson, KPMG’s head of corporate finance in Yorkshire and the North East, the trend will be mirrored in the North meaning that 2009 will be a very subdued year for M&A activity in Yorkshire.

“In Yorkshire, taking account of small and large transactions alike, deal volumes fell by 25 percent last year to 241 deals compared to 320 in 2007,” he added.

“I expect at least a similar percentage drop this year, which would see approximately 180 deals completing by the end of 2009 – little more than half the 2007 volume – before rising again in 2010.”

However, Mr Wilkinson said that it didn’t mean no deals will be done in the next few months. He said that quality businesses will continued to attract

“While the region’s private equity (PE) houses will find debt difficult to raise for all but gold plated investments, their appetite remains healthy,” continued Mr Wilkinson.

“Those in the PE market will be very aware that some of the best returns in recent years have been made on the back of investments during the last recession. The deal volumes in the Yorkshire market will be boosted by a continuation of two, at times interlinked, trends – the disposal of non core assets and stressed sales.”

Decline is affecting all sectors with technology basic materials and industrials registering the most significant deterioration.

Unlike the previous predictor, oil and gas has fallen along with telecommunications, consumer services and health care. The smallest decline was the consumer goods sector.

Utilities and industrials continue to maintain the highest debt ratios while the technology sector continues to show net cash, which reflects a traditional balance sheet structure for this peer group. However, health care has moved from a net cash position to one of net debt.

The survey did find reasons to be cheerful with analysis showing that the corner may start to be turned later this year.

“While this M&A downturn is different from previous ones, we can draw some parallels between the current situation and how we emerged from the last big deals recession in the early 1990s,” said Mr Wilkinson.

“I am optimistic that following a similar pattern, we will start to emerge this year and by the close of 2010 we will be back in business, able to put this M&A downturn behind us and looking forward to a sustained recovery in transactional activity.”

He added: “A reliable indicator that this time has arrived will be when quality assets come on the market and go for reasonable, rather than fire-sale, prices.”