KPMG: UK M&A appetite outpaces US and Europe

22 September 2015 Consultancy.uk

M&A appetite in the UK continues to outpace that in the rest of Europe and the US, research by KPMG finds. According to the firm’s survey, global confidence and capacity for M&A deals is up 11% and 7% respectively for the coming 12 months, with especially the Asian region projected to enjoy strong M&A activity. Globally, deal volume and the value of deals are however down on the six months previous, with 8% and 30% respectively.

Since 2007, KPMG releases a biannual forecast for M&A appetite across various regions and markets. To determine trends in the market and make relevant forecasts, the consulting firm maps the rise or fall of forward P/E (price/earnings) to gauge the confidence of the market, while using the net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratios to determine the future capacity of companies to fund acquisitions. The prediction uses information from 1,000 of the world’s largest companies by market capitalisation.

Global appetite and capacity
Global appetite for M&A deals is expected to be on the increase across all markets and industries over the coming year as global confidence increases by 11% (as forward P/E ratios) and deal capacity by 7% (as net debt/EBITDA).

Confidence and capacity growth

Although the global picture is projected to improve, considerable regional differences remain. China is by far the biggest mover in terms of P/E ratio, up 71% in the coming 12 months. For Africa and the Middle East, the researchers foresee 12% increases in ratio and for Latin America 25%. The US and Europe are expected to see below average appetite for M&A, with 6% and 8% forward P/E ratios respectively. The appetite for deals in the UK continues to outstrip those of the US and the rest of Europe according to the survey; the largest corporates in the UK are expected to improve their forward P/E ratios by 13%, 5% above the European average and 7% above that of the US.

In terms of capacity, Asian corporations will likely play a considerable role in M&A with their capacity for deals well above average. Japan’s corporate capacity is forecasted to rise 26% in its capacity to enact deals, while China sees a 15% rise in capacity. In Europe, capacity increases remain relatively stable with Germany and Switzerland increasing their capacity slightly as many paid down debt, while France sees a marginal decline on barely budging debt and EBITA figures and the UK is expected to see a 7% decline.

Market confidence by industry sector

Individual markets
Confidence in the energy sector remains low as oil prices particularly remain subdued. The 19% decline in market capitalisation of largest corporates in the sector reflects the continued difficulties faced by the industry – dropping from $4.8 billion in June 2014 to $3.9 billion, while profits plunged 37% in the same timeframe.

The healthcare sector on the other hand is doing well according to the analysis, with 18% increase in market capitalisation, 10% increase in profits and appetites for M&A up 7%. Telecommunications is also looking relatively strong and sees its capacity up 5% and appetites 8% in the projection for the coming 12 months. Consumer discretionary appetites is expected to increase by 9%, however capacity in the sector will grow strongly by 29%.

Worldwide completed and announced deals

Incomplete deals
According to the analysis, while the year started off well in terms of deal value and volume, M&A activity has since decreased on both fronts. The volume of deals is down from 24,477 in February to 22,492 in June, an 8% decrease. The value of the deals also fell, by 30% in the same period, from $2.2 billion to slightly over $1.5 billion. The divergence between announced deal values and completed deal values also increased markedly since the end of last year when announced deals were generally of lesser value than today but actual deals came in considerably higher in value.

Regionally, the drop off was the most marked in the AsPac – which is regarded as the global barometer of M&A activity – with completed deals down 14% between January and June, even as the number of announced deals rose. Completed deals in Europe, the Middle East and Africa all declined 7% in the past six months – while the UK saw an 8% decline.

Phil Isom, Global Head of M&A and Partner at KPMG in the US, comments: “With oil prices continuing to experience new multi-year lows and credit tightening in the sector, we expect opportunistic buying, forced selling and the resetting of capital structures. If global supply and demand forces stabilise, healthy deal activity may pick up.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.