PRINT THIS PAGE European private equity cycle peaking as corporates fight back09/05/2007. Source: KPMG.
As the M&A boom heads towards its peak, a divergence of opinion on prospects for 2007 is emerging between private equity houses and the corporate sector. Private equity is less enthusiastic than the corporate sector about the prospects for European mid-market M&A activity over the next six months, according to KPMG International’s European Mid-Market M&A Outlook. The M&A confidence barometer survey of around 270 mid-market corporates and private equity houses across Europe, reveals that around half (58 percent) of private equity respondents expect M&A activity to increase in their country in the next six months. By contrast, over two-thirds (67 percent) of corporate sector respondents expressed renewed confidence that the coming six months will see an increase in activity. With healthy balance sheets and excess cash, it seems corporates are firmly back on the growth agenda.
Steve Halbert, head of mid-markets in KPMG’s Corporate Finance practice and U.K. firm partner, comments: “A number of factors can explain private equity’s reduced confidence in European mid-market M&A over recent months. We have seen interest rates rising, an increased threat from infrastructure funds and growing concern about over-leveraging. By contrast, the corporate sector remains upbeat and confident about strategic deal-making showing they are truly back in the M&A space. So bullish is the corporate mood that 58 percent say they do not regard private equity – which has the edge in leveraging, motivating management and closing deals swiftly - as a threat.”
The survey also finds that a majority of respondents from both sectors believe valuations have increased compared to 12 months ago. Although, looking forward, 57 percent of corporates backed a continued increase in deal values compared to a more circumspect 48 percent of private equity respondents.
Steve Halbert comments: “There is agreement that valuations may now be close to levelling out. Indeed, private equity houses are now factoring in lower exit multiples for acquisition targets – a sign the private equity community is concerned about pricing levels. That said, whilst strong appetite for further M&A deal-making remains, the pressure cooker of competitive situations should not be underestimated.”
The over-leveraging of deals remains of heightened concern with over-two thirds of both corporate (74 percent) and private equity (83 percent) respondents. However, both groups express confidence that this will not cause major problems, with only three and four percent respectively indicating that it may cause a crisis. It appears there is an awareness that the market will somehow cope and any collapsing mid-market investments are likely to be isolated and not systematic. Failing assets are relatively rare in private equity and are usually more than compensated for by other successful portfolio company gains.
‘Growing market share’ remains the leading strategic purpose for M&A. However, respondents are in a more expansive mindset with ‘accessing new markets’ the second most ranked factor (ranked third six months ago). In tandem with this, confidence in pursuing cross-border deals has edged upwards slightly with interest in the U.S. growing thanks to the cheap U.S. dollar. However, companies could still be missing investment opportunities in high-growth emerging economies particularly given a lack of confidence expressed in Russia, which slipped below Asia (excluding China and India).
Steve Halbert, comments: “National boundaries are beginning to fall away with increasing levels of foreign buyers for mid-market assets. Central and Eastern Europe remain areas of continued M&A interest which can only grow as Western European mid-market corporates look to grow market share and lower the cost of operations. While confidence is high, corporates remain hungry for new transactions across a range of territories and sectors.”
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KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG LLP operates from 22 offices across the UK with 9,000 partners and staff. KPMG recorded a UK fee income of £1,066 million in the year ended September 2004. KPMG LLP, a UK limited liability partnership, is the UK member firm of KPMG International, a Swiss cooperative.
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