Greater global appetite for M&As this year

Singapore

LARGE global corporates are expected to be on a bigger prowl for mergers and acquisitions (M&As) this year, and will likely have more capacity to fund these prospective transactions, says a KPMG report. But Singapore - which outperformed its Asean peers in M&As last year - is expected to see a dip in acquisition appetite, the Thursday report noted.

The auditing firm looked at the predicted forward price-to-earnings (P/E) ratio as one measure of corporate appetite, and found that this has grown 7 per cent over the past year, overall. The forward P/E ratio measures the price that a stock trades at currently, relative to its future earnings - usually in 12 months' time.

Meanwhile, the ability to fund transactions - as measured by forecast net debt to earnings before tax, depreciation and amortisation (Ebitda) - is expected to improve 14 per cent over the next year, with the largest companies paying down debt and stock-piling cash. The ratio is one measure of leverage, though it should be noted that the most appropriate level of debt relative to earnings also depends on the industry in which the company is operating.

Said Vishal Sharma, KPMG's Asia-Pacific head of M&A: "The data indicates a return of confidence in the M&A markets. We are seeing an upswing after almost three years of decline."

The Asia-Pacific region excluding Japan is expecting the biggest increase in appetite: forward P/E ratios rose 12 per cent over the last year. The capacity to transact is predicted to rise by 15 per cent. As a whole, Asean numbers reflected the global trend, with P/E ratios up 10 per cent over the past year, and M&A capacity expected to improve by 14 per cent.

Still, Singapore's forward P/E ratio dropped 3 per cent - making it the only country in South-east Asia to see a fall in its ratio.

"The drop in Singapore's forward P/E ratio is a reflection in some ways of the global concerns around rising interest rates and weak growth expectations from the large economies of China and Japan," said Mr Sharma.

"Singapore, being an open economy, feels the effects of these likely headwinds faster than some of the other economies such as Thailand, Malaysia and Philippines."

In South-east Asia, the total value of completed M&As in the region in 2014 was down 5 per cent from a year ago to US$84.9 billion, showed data from Thomson Reuters as at mid-December last year.

Singapore, though, was the clear outlier last year, with its total value of completed deals hitting US$64.7 billion. This was up 75 per cent compared to 2013 - and the highest since 2008. This would include OCBC's S$6.2 billion acquisition of Wing Hang Bank. With the fall in oil prices, the energy industry is the only one that showed a decrease in capacity.

Conversely, the tech sector continued to shape up with an improvement in cash reserves, resulting in an expected increase in capacity of 73 per cent over the next year.

The KPMG report is produced bi-annually, using data from 1,000 of the largest companies in the world by market capitalisation. The financial services and property sectors are excluded from its analysis.