KPMG’s annual Global M&A Predictor found that forward price to earnings ratios – the price firms pay for shares compared to company performance – are 5 per cent higher globally and 9 percent up in Europe compared with last year’s figures. This suggests a bigger ‘appetite’ for deals within the sector, the company says.

Last year, merger and acquisition predictions were not met because analysts over-estimated company earnings and thus concluded that firms would have more capacity to grow by acquisition than they did, according to Andy Hales, Corporate Finance Partner for Diversified Industrials at KPMG.

“Crunching the numbers shows just how much analysts overestimated corporate earnings in the sector in 2009 – by 32% – thus skewing any clear view of the market for mergers and acquisitions,” he said. “The latest company earnings forecasts look far more sensible, suggesting reality has finally caught up with the market. With feet firmly planted back on terra firma and earnings forecasts reset to sensible levels, M&A is set to make a modest return in 2010.”

Furthermore, corporate debt compared to earnings is expected to decline in 2010, suggesting that there is more capacity to do deals even though debt is still tight.

“The modest increase in corporate capacity and appetite to do deals feels far more realistic than predictions made this time last year,” added Hales. “It is important to highlight, however, that this data is very much about the corporate market only.”