The Shift From a Seller's Market To a Buyer's Market When Interest Rates Rise

So if you are a business owner considering selling your company, the good news is that right now, it's a seller's M&A market. By October of 2021, total M&A deal activity reached $4.4 trillion, which is an increase of 92% compared to a year ago and is the strongest opening period for M&A since 1980. In addition, merger activity resulted in deals totaling $1.52 trillion in the three months prior to September 27, 2021. That's up 38% from the same quarter in 2020—and more than any other quarter on record.

In a seller's market, demand is high for assets that are in limited supply, giving sellers more pricing and negotiating power. This demand can be attributed to a recovering economy, high cash balances, big government spending, new SPAC buyers, and low-interest rates. Plus, investors are flush with cash and ready to spend it on acquisitions that can help create growth or add capabilities. When market conditions shift, buyers have the upper hand in deal negotiations. And this could happen when the U.S. Federal Reserve increases interest rates in the next year or so.
The Federal Reserve and other central banks worldwide have maintained low rates to aid economic recovery through and after the height of the COVID-19 pandemic. Currently, interest rates are at zero. But possible changes to Federal Reserve policy could put rates on an upward path, which can put a damper on deal activity, especially during times of inflation. Interest rates, which can basically be defined as the price of borrowing money, impact the stock market, which is tied to the M&A market. They also are a factor in the supply and demand of credit. When interest rates are low, companies and banks have an incentive to borrow money and invest it.

The Federal Reserve usually raises interest rates to ease strong economic growth and to curb inflation, but current circumstances indicate that inflation right now is on the supply side rather than the demand side. Raising rates is not very effective against supply-side price increases.

Private equity firms tend to be more reactive to interest rate hikes because of the primary investment strategies used—venture capital and leveraged buyouts. Under deals such as leveraged buyouts (where the company is taken private using outside financing with other types of corporate restructurings that carry a large amount of debt), interest rates are a huge factor in M&A. When rates are low, takeovers are usually more profitable. Also, companies that might normally seem unattractive to acquire could be more profitable for M&A buyers, resulting in a larger pool of qualified businesses to buy and a hotter M&A market.
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At this point, no one really knows exactly when interest rates could see a hike, and the M&A market is still going strong. There is speculation that a rate increase could happen as early as May or June 2022. Some experts even speculate that there could be two increases in a rather quick succession. Bond markets have already started pricing for two quarter-point rate hikes in the second half of 2022. The St. Louis Federal Reserve president, James Bullard, told CNBC that he expects the U.S. central bank to raise its benchmark rate twice in 2022. This prediction is based on current economic data and is subject to change over time. There will be a serious assessment of whether rate increases may occur in the spring of 2022. If rates are increased, the M&A market could shift from a seller's market to a buyer's market.

This makes 2021 and early 2022 an ideal time to sell your company. Waiting could be detrimental to the valuation of your business and ultimately how much money you take away from the negotiating table. It would be best to keep in mind that it takes time to sell a business—usually, several months to even a year, depending on sector dynamics. Right now, there is no better time to get ahead of the game. Please take a minute to talk to our experts at Benchmark International about how we can help you get the maximum value for your company and when may be the best time for you to take your business to market.

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