Macroeconomic conditions have a huge influence on the activity of mergers and acquisitions. Interest rates, GDP growth, inflation, and market conditions in general have a direct impact on the deal strategies, timing, and even success of an M&A. Here are some of the most major influences of macroeconomic factors on M&A activity:
- Interest Rates
Low Interest Rates: Lower interest rates by central banks result in lesser borrowing costs, so that more M&A deals can be financed through debt by companies. It usually increases the M&A activities as companies are more likely to make acquisitions through leveraged finance.
Rather, a higher interest rate causes a cost burden because of the debt taken; therefore, companies may shy away from seeking debt to finance their acquisition of purchases. Such behavior lowers the desire for healthy M&A practice.
- Economic Growth and Expansion as Measured by GDP
Boom Periods: In a good economy, companies have more cash flow and are much more confident, thus more strategic in their acquisitions to expand market share, diversify offerings, or just enter different markets. A good economy generally breeds a healthy M&A environment.
Recessions and Slowdowns: M&A activity is typically slower in a recessionary or slow-down economy, largely as a result of a heavy focus on cost-cutting, paying off debt, and stabilizing operations versus expansion. However, there could be acquisition opportunities through distressed assets at bargain prices.
- Stock Market Performance
A Good Equity Market: A strong stock market acts as currency for deal-making, particularly in all-equity deals. A surging market makes the acquisition look good and peaks up the volumes of deals.
Weak Stock Market: Whenever markets are unstable or not performing, companies may not be as keen to do deals as equity financing decreases in desirability and the danger of overvaluation is increased.
- Inflation
Moderate Inflation: It sometimes supports M&A activity through moderate inflation, as the pressures of a rising cost are compensated for by reducing the amount of expense through consolidation and efficiency. Sometimes acquisitions are done for the sake of pricing power and fighting increases in cost.
High Inflation: High inflation, particularly accompanied by a rise in input costs, causes uncertainty in the economy and reduced purchasing power; therefore, it would discourage M&A deals. The cost of capital will also be on the higher side in the high-inflation environment due to the added cost of funding an acquisition.
- The Regulatory Environment
Favorable Policies: Companies are more likely to be engaged in M&A due to the good circumstances in a pro-business regulatory environment, where the tax will be low and the regulations less burdensome. That can also facilitate more approvals by the regulatory body to increase the degree of overall activity.
Uncertainty or Strict Regulations: Unless the regulatory environment is clear, stringent antitrust laws prevail, or heavy taxes are imposed, companies go in for M&A very gradually. “Uncertainty over new regulations generally results in shy deal-making.”.
- Currency exchange rate
A strong domestic currency: A strong domestic currency compared to foreign currencies enhances the affordable acquisition of a target abroad, thereby encouraging cross-border M&A. This goes well for multinational companies looking for an effective way of expanding their operations worldwide.
Weak Home Country Currency: The more a country’s home currency deteriorates, the more expensive it is for the business to purchase foreign assets and therefore less appealing international offers. Sometimes the companies even get excited about acquiring in their country.
- Sector-specific economic conditions
The M&A would probably pass through certain particular phases of the economic sector if it happens to be related to technology, health care, or energy. For example, in an inflationary market for commodity prices, companies involved in sectors related to energy might probably make more attempts at M&A just in order to capture resources or grow market presence. Similarly, during a boom in the technology sector, companies will tend to acquire aggressively for intellectual property or talent.
- Liquidity and Credit Conditions
Tight Credit Market: Under tight liquidity conditions, where banks and financial institutions are hesitant to lend, companies would find it challenging to finance deals, and M&A activity would be low.
On the other hand, if credit is abundant, companies will find it relatively easier to obtain financing for acquisitions, thereby increasing overall deal activity.
- Corporate confidence and sensitivity
CEO and corporate board confidence is going to play a large part in whether or not firms are going to venture into M&A. During times of economic uncertainty—whether it’s due to geopolitical tensions or some form of financial crisis—the level of corporate confidence recedes, and firms will frequently wait until things clear up before venturing into some bold strategic moves.
Conversely, companies may feel bolder to pursue an acquisition-based aggressive growth strategy during periods of the market that are optimistically or euphorically favorable.
- International Event and Geopolitical Risk
For instance, the big global shocks, like the COVID-19 pandemic, geopolitical conflict, or a trade war. During such time, strategic opportunities increase, but most corporations will act “wait and see” and postpone or even cancel deals due to an increased uncertainty level. However, these events can lead to strategic opportunities, particularly where asset prices decline or distressed companies become an attractive target.
Conclusion
Quite naturally, macroeconomic conditions constitute a significant part of the business environment for M&A activity. Expansionary periods, favorable interest rates, and a healthy equity market tend to accelerate deals, whereas economic downturns, inflation, and regulatory uncertainty weigh the activity. Hence, these companies need to pay close attention to these factors that can further optimize the timing and strategy of mergers and acquisitions.