The Impact of Interest Rates on M&A Activity

Mergers and acquisitions (M&A) play a pivotal role in helping companies diversify, grow, and streamline operations; however, external factors can heavily shape the overall viability of M&A deals. Interest rates are one such factor. Learning how interest rates impact M&A transactions is essential for businesses and investors alike who are hoping to drive successful outcomes in dynamic markets. Continue reading to understand the complex market dynamics that can make or break M&A transactions.

How Do Interest Rates Influence M&A Deals?

Interest rates play a significant role in shaping M&A activity around the world by influencing the cost of capital, altering valuation adjustments, and impacting market sentiment. Learn more about how all these factors interact to see how interest rates can impact your potential M&A transaction.

The Cost of Capital

First and foremost, interest rates directly affect the cost of capital, which is one of the most critical considerations in an M&A transaction. When interest rates are lower, borrowing money becomes cheaper, which often encourages companies to take on debt to fund acquisitions. On the other hand, higher interest rates can increase this cost of borrowing, making debt-financed deals less appealing, thus reducing M&A activity.

Valuation Adjustments

A business valuation is conducted to determine the worth of companies involved in M&A transactions. Higher interest rates can lead to increased discount rates that lower the present value of future cash flows, thereby making current valuations more conservative. This adjustment can affect both buyers and sellers in a transaction, potentially slowing down negotiations and deal structures as each party adjusts to the new market conditions.

Market Sentiment

Finally, interest rates also make significant waves in market sentiments, which are critical drivers of M&A activity. Lower rates often lead to increased investor confidence, which, in turn, often results in a greater appetite for risk. When rates are on the rise, generally due to an effort to curb the money supply, it is perceived as uncertainty about current economic conditions, which tends to dampen enthusiasm. Many businesses take this time to pause or reconsider acquisition plans until sentiment goes on the rise once more.

Navigate interest rate volatility with experienced M&A advisors.

With rates currently being cut and potentially more cuts being forecasted in the future, it’s natural to wonder if now is the time to consider an M&A transaction your organization has been sitting on. Navigating M&A transactions is best done with strategic expertise when in a volatile interest rate environment.

At SBB Capital Partners, we serve middle-market companies throughout the United States, specifically representing clients whose organizations range in value from $5 million to $100 million. Whether your goal is to prepare your company for sale, understand its value, market it to prospective strategic buyers, or begin exit planning, our experience can help you reach your goals. Reach out to us today at SBB Capital Partners for all your M&A transactions needs.