One of the main factors, that influence management decisions regarding to mergers and acquisitions are the prevailing interest rates. Rising interest rates in a slowly growing economy, have a negative impact on the M&A market. This means that the speed at which interest rates rise or fall is a key factor affecting the M&A market. A slow but gradual rise in interest rates in a strong economy builds confidence among businesses and this results in increasing M&A activity. On the other hand, a sudden rise in interest rates in moderate economic conditions, creates instability in the market. This reduces M&A activity for some time.
A large part of the transaction volume of the M&A deal is obtained from external finance sources. These includes, for example, Unitrance-debt and Mezzanine-loans. It is important to pay attention to interest rates and the maturity of the financing, as high-interest costs, reduce sales and thus influence the cash flow of the company.
In general, management buyouts and leveraged buyouts are highly dependent on the ability of a company to obtain a loan at a good interest rate. Since, as described above, the cost of the loan has a significant impact on sales and thus determines the overall return that investors will receive. In simple terms, high-interest rates mean lower overall returns for investors.
What should be considered during the process?
Attention should be paid to the development of the economy and the company. In combination with a critical look at current and future interest rate changes. This allows an initial decision on how much debt should be raised to finance the transaction.