KPMG's U.S. Corporate Finance unit has seen M&A activity among middle-market companies rise about 25 percent so far this year over last year, according to a new report.

KPMG reported Thursday that M&A activity is being driven largely by owners of privately held businesses who are now more motivated to sell due to uncertainty about future capital gains tax rates and corporate carve-out activity. Corporations are pruning businesses that have value but are not performing up to expectations.

However, “M&A appetite,” a measure of confidence based on projected-forward price to earnings ratios, has fallen by 2 percent in the U.S. since December 2011, when KPMG’s previous M&A Predictor report was published. While that represents a decline, the U.S. numbers compare favorably with a more severe drop of 19 percent globally. 

In many other regions, the M&A appetite numbers reported by KPMG were also down: 17 percent in Europe, and 28 percent in the Asia-Pacific region. M&A appetite declined 8 percent in China and 13 percent in Japan. 

Globally, including the U.S., companies are paying down debt and building up cash. Other factors contributing to the downward trends are economic uncertainties in the Euro zone and uncertainty surrounding capital gains taxes ahead of the U.S. presidential election in November.

“While uncertainty has created a global slowdown in M&A, KPMG Corporate Finance, specifically in the U.S., has seen optimism on both the corporate and private equity fronts and a willingness to deploy capital,” said KPMG Corporate Finance and Restructuring principal and leader Phil Isom in a statement. “In fact, based on current activity levels, the second half is on track to be more active than the first half of 2012 in the U.S. middle market.”

The largest companies around the world, in nearly all sectors, are expected to return to profit growth and are driving down debt, creating substantial capacity for M&A activity. While profit predictions and cash positions are positive, price to earnings ratios, which indicate corporate appetite to do deals, have fallen 3 percent. Indeed the calculation used in the M&A Predictor to test appetite shows that the United Kingdom is the only major M&A market with an increasing appetite for M&A activity.

“The largest companies around the world, viewed through an M&A lens, are confusing places to be,” said KPMG global head of M&A David Simpson in a statement. “On the one hand profit expectations are up 7 percent compared with six months ago. On the other hand, the lack of longer-term stability can be seen in the lag of market capitalizations behind profit expectations. Profit expectations might be up 7 percent, but market capitalizations are only up 4 percent. Companies are also driving down their net debt, compared to earnings, but this is not translating into confident acquisitive activity.”

The global outlook for large corporate M&A activity, broken down by sector, indicates that energy has the least appetite of the various sectors, with its price to earnings ratio down 10 percent. Consumer discretionary products followed closely behind, with its P/E ratio down 9 percent. In contrast, health care has the strongest M&A appetite of the various sectors, with the P/E ratio up 4 percent.

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