The recent rise in interest rates has had a significant impact on M&A activity over the past 12 months. The higher cost of borrowing has made it more expensive for companies to finance acquisitions, and this has led to a decline in deal volume.
Source: Board of Governors of the Federal Reserve System, accessed via
fred.stlouisfed.org on August 10, 2023. Of note, although the recent rise in rates brings them back to historical norms, it represents a break from over two decades of declining rates followed by a period where rates were near zero.
In a survey undertaken by Pepperdine University Graziadio Business School earlier this year, investment bankers reported decreases in deal flow, leverage and deal multiples,
and worsened general business conditions. (See page 38 of the report.)
According to data from Refinitiv, the global M&A deal volume in the first quarter of 2023 was down 20% from the same period in 2022. The decline was particularly pronounced in the United States, where deal volume fell by 30%.
Source: Bain Private Equity Mid-Year Report (2023)
There are a number of reasons why the rise in interest rates has had a negative impact on M&A activity. First, the higher cost of borrowing makes it more expensive for companies to finance acquisitions. This is especially true for companies that are using debt to finance their deals.
Second, the rise in interest rates has led to a decline in the valuation of companies. This is because the higher cost of borrowing makes it less attractive for investors to buy companies at high valuations.
Third, the rise in interest rates has created uncertainty in the market. This uncertainty has made it more difficult for companies to assess the value of potential acquisition targets.
The rise in interest rates is likely to continue to have a negative impact on M&A activity in the coming months, particularly given the presence valuation gaps between what business owners expect to sell their companies for and what buyers are willing to pay.