The last five years have been turbulent for the M&A market. Deal value went from record highs in 2021 to falling below the level recorded in the year of the pandemic, according to PwC data. Even more striking is the fever chart traced by deal count, which shows that deal value has dropped sharply over the last two years even though the number of deals remains higher than in the years before the all-time record.
With this picture in mind, it's easier to outline the impact the global economy has on investing in or acquiring SMEs. Behind the figures in the chart are macroeconomic factors that speed up or slow down M&A processes.
The effect of inflation and interest rates on M&A
Before diving into the data to better see the impact of monetary policy decisions, let's take a moment to explain how inflation and interest rates affect investments in and acquisitions of SMEs.
When inflation consistently rises above 2%, central banks raise interest rates to bring it down. As the price of money goes up, credit becomes more expensive, which dampens demand for financing from consumers and businesses because borrowing costs are higher. As consumption falls, food and service prices decline, bringing inflation back to target.
Conversely, when this indicator is low (which can be a sign of an economic slowdown), monetary authorities cut rates to make financing cheaper and thereby stimulate consumption and lending.
Now that we've covered how inflation and interest rates affect financing conditions, let's look at their effect on M&A processes.
2014–2018: a boom fueled by zero rates
This period was marked by historically low interest rates, at 0% in Europe and close to that level in the United States. It was an unprecedented stage in monetary policy, because inflation was persistently running below the 2% target and central banks were trying to push up prices and, in turn, revive economies that had not yet fully recovered from the Great Recession triggered by the collapse of Lehman Brothers and its knock-on effect on the global financial system.
In this context, financing became cheaper and companies took on debt on the back of low rates, which encouraged the M&A market to grow through leverage. Access to cheap financing and competition for valuable assets pushed up the valuations of target companies.
During these years, deal volume reached what was then the highest figure in history, according to the consensus of various consulting firms, at 4.7 trillion in 2015, driven by sectors such as technology, healthcare, and energy. In the following years, activity slowed but remained at high levels, around 4 trillion.
2019–2021: a peak despite COVID-19
Toward the end of 2019, there was a growing expectation that central banks, especially the U.S. Federal Reserve, would begin raising interest rates to normalize monetary policy, which created some caution in the M&A market.
The outbreak of the pandemic had an immediate and significant impact on the M&A market, with a drop in activity. Global economic uncertainty, together with operational restrictions and volatility in financial markets, led to a decline in transaction value and volume. Many companies chose to suspend or cancel their plans to invest in and acquire SMEs.
But economies soon began to adapt to the new situation and prospects for economic recovery emerged, which revived M&A to such an extent that 2021 set a new all-time record, as mentioned above.
This recovery was driven by several factors:
- Excess liquidity and low financing costs: massive economic stimulus and ultra-loose monetary policies kept financing costs low, encouraging companies to make acquisitions.
- Digital transformation and restructuring: sectors such as technology and healthcare saw a large number of transactions as companies sought to adapt to the changes accelerated by the pandemic, such as digitalization and new healthcare needs. There was also strong interest in emerging sectors such as fintech, renewable energy, and biotechnology, reflecting the shifting priorities of investors and companies.
2022–2023: a change in the cycle
First the end of lockdowns and then the war in Ukraine following the Russian invasion sent inflation soaring to highs not seen since the 1980s, exceeding 10% in some countries and months. This forced central banks to return monetary policy to normal and raise rates from 0% to the current 5.5% in the United States and 4.25% in Europe.
Faced with this change in the cycle, which has made financing more expensive, and the enormous global geopolitical and economic uncertainty, M&A fell from 5 trillion in 2021 to 2.5 trillion in 2023, although deal count remained high. Investors have become more cautious and selective, focusing on transactions with clear synergies and solid returns.
Today: light at the end of the tunnel
The measures to bring inflation under control have already taken effect, and prices are approaching the target level. Central banks are starting to change their tone, and some regions, such as the eurozone, have begun cutting interest rates.
A new scenario of recovery in M&A activity is taking shape.
