How Interest Rate Cuts Are Expected to Impact M&A Activity in the 4th Quarter of 2024

The Federal Reserve's recent interest rate cuts have generated considerable discussion, especially regarding their potential influence on mergers and acquisitions (M&A) activity. As we look toward the 4th Quarter of 2024, these cuts are expected to catalyze increased deal-making across the corporate and private equity sectors. Here's a breakdown of how rate cuts might shape the M&A landscape in the coming months:

1. Catalyst for Increased Activity

Lower interest rates generally encourage borrowing, and this time is no different. The Fed's rate cuts are anticipated to spark a surge in M&A activity. The current economic conditions seem more favorable than in previous rate-cut periods, providing a conducive environment for deal-making. Both buyers and sellers are expected to become more active in the market as financing becomes more affordable.

2. Improved Financing Conditions

One of the most direct impacts of rate cuts is the reduction in borrowing costs, making it easier to finance acquisitions. This means lower loan yields will lead to higher leverage ratios and could result in increased M&A valuations—particularly for leveraged buyouts (LBOs). As loan pricing drops, financing conditions improve, making deal-making more accessible and attractive for both corporate buyers and private equity firms.

3. Higher Valuation Multiples

As loan yields decrease into the 6-8% range, we could see leverage ratios, which represent the proportion of a company's capital that comes in the form of debt, increase by half a turn or more from the 4.8x EBITDA seen earlier this year. Historical data suggests that this could lead to an average increase in valuation multiples by nearly a full turn, making businesses more valuable in the eyes of buyers. For sellers, this presents an opportunity to achieve higher sale prices.

4. Boost for Private Equity

The new rate environment is also likely to boost private equity activity. Lower financing costs make it more appealing for private equity firms to fund new deals and exit existing investments. With more affordable debt and increased confidence in the market, expect an uptick in private equity-driven M&A in the coming quarters.

5. Increased Transaction Volume

With reduced borrowing costs and improved market conditions, experts predict a surge in transaction volume. The narrowing of the bid-ask spread between buyers and sellers—combined with greater credit availability—should lead to more deals getting done. As financing becomes more accessible, expect more buyers to enter the market, fueling activity.

6. Delayed but Positive Impact

Though the full effects of the rate cuts may take time to manifest, the overall sentiment is positive. Many dealmakers have anticipated this move for much of the year, and its effects are expected to accelerate as the market adapts. The long-term outlook for M&A activity remains optimistic as these conditions take root.

7. Recovery from a Prolonged Downturn

The M&A market has experienced a prolonged downturn, but experts believe a recovery is long overdue. The rate cuts are likely to boost confidence in M&A deals, particularly by reducing transaction expenses and stimulating demand. John Ferrara of Capstone Partners notes that the market has been in an "abnormally prolonged down cycle," and these changes could signal the start of a much-needed recovery.

8. Projected Growth

Looking ahead, the EY-Parthenon Deal Barometer projects that US corporate M&A deal volume will rise by 20% in 2024, following a 17% contraction in 2023. Deal volumes in the private equity space are expected to rebound by 16%. These projections highlight the expected positive impact of the rate cuts on overall M&A activity in the near future.

As we head into the 4th Quarter of 2024, the Federal Reserve's rate cuts are creating a more favorable environment for mergers and acquisitions. Improved financing conditions, higher valuations, and increased transaction volumes are expected to revitalize the market, benefiting both corporate and private equity sectors.

Whether you're considering buying or selling a business, now is the time to proactively assess how these changes could impact your strategy. Understanding and adapting to these shifts in the M&A landscape will be crucial for success in the coming quarters.

I hope you find these insights as valuable as I did. If you have any questions or would like to discuss this topic further, feel free to reach out and schedule an appointment https://hihello.me/hi/meetkyle

Click HERE for a Complimentary Business Value Gap Assessment for your company

(For Companies with $5MM+ in Annual Revenues)

Let's continue to stay informed and prepared to make the best decisions for our businesses.

Best Regards,

Kyle Griffith, CBI, CM&AP

Managing Partner

The NYBB Group

CEO & Founder

Eminae Network

#MergersAndAcquisitions #InterestRates #BusinessGrowth #CorporateStrategy #PrivateEquity #DealMaking