How the Recent Economic Landscape is Impacting the M&A Market

Were you planning on retiring soon? I’m sure this market has given you second thoughts. I’ve tried to not be a worrywart over the past year, and I do my best to listen to the Dollar-Cost-Averaging (DCA) theories and continue buying. Then I think, is this overbuying what’s keeping this market from full recession? Then again, Amazon had just under $5B in sales over the last holiday weekend. The short of it is, we never can predict the future, but we will sure try and make our best guess.

How does this relate to M&A?

On a broad level, the macroeconomy impacts the M&A market. As the federal reserve has been raising interest rates, the cost of borrowing has continued to rise combined with higher risk-free rates of interest being earned on cash. The impact of the losses from the last few quarters of the stock market were felt by everyone. Companies have been affected via their earnings reports or stock fluctuations. The impact is then felt by M&A.

Factors impacting the level of M&A activity include the following:

• Overall market trends and the sentiment of the macroeconomy
• Inflation
• Money supply and the availability of debt

Each of these items are hot topics.  

According to the U.S. Bureau of Labor Statistics for October of 2022, the All Items index increased 0.4%, totaling 7.7% over the last 12 months. Many companies are beginning to have difficulty passing on the higher costs to customers because fiscal tightening continues to put stress on the overall market and cash flows for many companies and individuals.  

As inflation has been on the rise, the Fed has been raising interest rates in an effort to reduce and curb inflation. Although the economy appears to be a in rough patch, there are always opportunities to invest and improve internally. Sometimes another set of eyes is just what you need. 

In other recent news, The Federal Reserve raised the federal funds interest rates from 3.75% to 4.00%. This is not just impacting the VC market, but also consumers. Mortgage rates have climbed from 2.86% this time last year to 5.81% according to Forbes Advisor. Inflation combined with higher federal funds rates and the negative overall sentiment towards the market is leading to shrinking profitability.

What we are seeing:

Adobe’s planned acquisition of Figma for $20B was announced approximately two months ago. For some, this may be an exciting topic and show future earning potential. However, only 173 acquisitions of VC-backed companies were announced or closed in the last quarter (Q3). That might sound like a significant number of transactions, but compared to historical levels, it’s quite low. 

On the other side of the coin is Private Equity (PE). PE has both the capital and willingness to do deals. Overall, they have seen a comparable number of deals compared to last year. PE has run into some difficulties much like the market has, but not for the same reasons.  The macroeconomy is stifling growth for companies across many industries and as a result, the opportunities don’t seem as prevalent.  However, everyone can agree that 2021 was an outlier, and not sustainable. The resulting impact has been a slowdown in the number of transactions. However, PE has assured us that the appetite for deals is high and optimistic. 

If you are planning to retire, M&A is an option, along with succession planning and various useful approaches that we have assisted our clients with. If you have more questions on the process of a deal, feel free to reach out. Sell-side due diligence could be an option.

About Schneider Downs Business Consulting

Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment. Our team features experienced professionals across a diverse array of specialties that allows us to help our clients make more informed business decisions across every facet of their operations.

To learn more, visit our dedicated Business Consulting page.