Lower Corporate Debt, Higher Profits Boost Prospects for U.S. M&A
Forecasts of lower corporate debt and higher profits in the U.S. signal a promising U.S. mergers and acquisitions market, according to the latest Global M&A Predictor study from KPMG International, the global network of audit, tax and advisory firms.
One cause for M&A optimism in the U.S. is a downward trend in net debt/EBITDA ratios. The U.S. companies analyzed are deleveraging faster than their global counterparts, with net debt projected to fall 34% by June 2012, compared to 19% globally.
“Companies have paid down their debts and have more cash on hand, which should provide them with more capacity to borrow and fund future acquisitions,” said Phil Isom, the U.S. leader of KPMG Corporate Finance LLC. “As a result, corporate buyers may now have the upper hand when negotiating attractive acquisitions.”
“There is additional cause for optimism when you consider that the indicators examined in the study are moving in a positive direction collectively, which should ignite deals in the future,” Isom said.
In addition, U.S. companies are expected to experience a slightly faster growth rate in net profits, with U.S. companies’ net profits projected to increase 17% compared to a 15% anticipated increase in global net profits.
And despite being down slightly in the latest period, U.S. P/E (price/earnings) ratios remain at a premium to the global averages – 12.2 in the U.S. versus 11.2 globally. Isom pointed out that, “This not only signals improved investor confidence in the U.S. market, but provides a good indication that M&A activity, particularly in the U.S., continues to improve on last year’s levels.
“As companies become more profitable and strengthen their balance sheets, we expect management teams to increasingly look at inorganic strategies to further drive the growth that shareholders are demanding,” Isom added.
KPMG’s M&A Predictor, established in 2007, looks at the appetite and capacity for M&A deals by tracking and projecting important indicators 12 months forward. The rise or fall of forward P/E (price/earnings) ratios offers a good guide to overall market confidence, while net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratios help gauge the capacity of companies to fund future acquisitions.
KPMG Corporate Finance LLC provides a broad range of investment banking and advisory services, including advising on mergers and acquisitions, sales and divestitures, buyouts, financings, debt restructurings, equity recapitalizations, and infrastructure project finance.