real interest rates fueling the M&A boom

27 Apr
With 7,834 mergers and acquisitions totaling $750 billion announced year-to-date, it’s clear deal-making is back in full swing. These numbers clearly show business executives have increased confidence in their businesses, to be sure, and that capital markets are offering abundant capital, greasing the skids. But I think it’s important to consider a higher-level fact to explain why we’re seeing so many deals. Namely, real (inflation-adjusted) interest rates are near 30-year lows. Not such a great proposition for capital providers. With extremely low financing costs, discount rate assumptions fall and so new projects and takeovers have a much lower hurdle to overcome in order to post a positive net present value (NPV). Thus, more projects/deals brought to the C-suite make sense today. The key word is ‘today’ because capital market eagerness and rates can change abruptly. Today’s baseline assumptions could be considered ridiculous tomorrow.

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