M&A activity in New Zealand expected to improve

o Appetite for M&A activity is improving. Some investors are starting to show more readiness than others; however, there is still clear evidence of investor caution.

o In the current climate, M&A activity which has strong strategic rationale is likely to succeed at the expense of the more speculative activity which we saw in the earlier part of the last decade.

A recovery in global M&A activity is forecast for 2011 as deal-making capacity continues to improve against a background of investor caution.

According to the latest KPMG Global M&A Predictor, forecast net debt to EBITDA ratios are set to tumble 18 percent over the next year, suggesting that M&A war-chests are now healthily stocked. Net debt globally will fall by 10 percent, showing extensive deleveraging, meaning that M&A capacity continues to improve strongly.

However, it is the forward PE ratios within the Predictor which will likely attract most attention - as an indicator of deal-making appetite. Globally, forward PE ratios are 11 percent down over the last twelve months (down from 14.4x to 12.8x).

Typically, this would suggest diminished deal-making appetite yet the decline should be viewed in the context of rising markets (up 12%) and even faster earnings expectations (up 26%), both of which are historic leading indicators of greater M&A activity.

Combine this with evidence that 2010 global deal activity rose to a level above that of 2005[1] and it leads KPMG to sound a positive note about predicted deal activity.

Tony McNaught, Head of Corporate Finance says, "While this is global data, anecdotally this is of relevance as M&A activity in New Zealand typically follows global M&A trends.

"In the current climate, we still expect M&A activity to be dominated by deals which have strong strategic rationale. Indeed these deals are likely to succeed at the expense of the more speculative activity, which we saw in the earlier part of the last decade - this is consistent with current investor sentiment and a general tone of caution".

The demand side of 2010's deal-making recovery has been driven by a number of factors including the steady build-up of cash by larger companies and the need to develop business scale, access new markets and technologies. This will be enhanced by the supply side in 2011, driven by a deal overhang from a variety of investors who have taken a wait and see approach over the last couple of years.

"Although there is clear evidence of investor caution, we are starting to see some investors willing to move more quickly than others," says Mr McNaught.

"What you tend to see is management teams keen to pursue growth ambitions coming up against investors who have a more cautious approach. Investor caution largely relates to lingering economic uncertainty which will inevitability take time to fully disperse. With improving sentiment we see that local investors are more cognisant of what is happening in global markets including developments in Asian markets."

The Global M&A Predictor states: "The expression often used at times like this is 'climbing a wall of worry' - in that the stock market is improving despite certain ongoing concerns or negative sentiment, including nervousness about interest rate rises and inflation. That's exactly what's happening in the global M&A market. Not everyone can bring themselves to endorse the optimism and some people are just faster climbers than others".

ENDS

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