Recently, Brian attended a networking event through the Alliance of Mergers and Acquisitions Advisors (AMAA). It was truly great to be in-person and interact with people face-to-face instead of over zoom. Not surprisingly, top advisors in the legal, finance, and banking communities discussed how the Federal Reserve’s interest rate increase will affect mergers and acquisitions.
As we have discussed in previous posts, many economists are predicting that interest rates will continue to rise over the next couple of years in order to combat inflation in the economy. Rising interest rates will make borrowing costs more expensive — and the cost to acquire a company will follow suit.
Many of our colleagues confirmed what we have been seeing: a noticeable decline in either volume of deals or the potential selling prices of businesses. Despite this latest trend, many deals were already in negotiations prior to the recent increases enacted by the Fed. It’s unclear how these in-progress deals will impact statistics over the remainder of the year. On the topic of anticipated volume of M&A work in 2022, most bankers we talked with were not so bullish.
As anticipated, the interest rate environment was a popular topic. During the first four months of 2022, the Fed increased the prime rate it charges other banks by 75 basis points. And many think it will continue to rise over the next 12 to 18 months, at a minimum. This will have a huge impact on the cost of borrowing money for both consumers and businesses. As mentioned, M&A deals are starting to slow down as companies consider the higher cost of buying a business and whether it will impact the viability of a purchase. On the investment side, most wealth advisors have been trying to find higher returns for their clients through potential investments in alternative sources, such as start-ups companies. The overall theme for this topic was that if you have excess cash, hold onto it. Take a pause to see if the valuations of companies start to come down and if a good opportunity to merge with another company arises.
World volatility is certainly impacting the US economy and behavior trends. Fear of the unknown likely decreases the appetite for risk-taking, especially considering the ripple effect of how lower demand in the face of an economic down leads to lower sales, higher prices, and higher consumer debt. Overarching limitations on domestic resources is also a grave concern as the war in Ukraine continues on.
Take-away: How ready your company is to either buy or sell in this environment? If you’re a business owner who is thinking about buying another company and wonder how acquisition will impact your company’s valuation in the current environment, contact Brian or Scott at email@example.com for a free diagnostic.
Co-founders & Managing Partners