What Can We Expect from the M&A Market in 2025?

For years following the COVID-19 outbreak, rising costs and interest rates kept investment dollars at bay. But with the recent announcement that the Fed will drop the Federal Funds rate by half a percentage point, we know that the economy is on an uphill trajectory. The mergers and acquisitions market has already begun to rebound in 2024, and we anticipate this rise in M&A deals to continue into 2025. What else can we expect from the M&A market?

Inflation will slow, but borrowing rates might lag.

The Fed’s goal has long been to keep inflation at or below 2%, which is predicted to be the optimal inflation rate to maximize employment and ensure stability in consumer prices. Following the coronavirus outbreak, inflation began to skyrocket, getting as high as 9.1% in mid-2022.  

Today, in October 2024, inflation has come back down to just above this 2% mark, and economists predict it will hit the Fed’s goal by early 2025.

What does this mean for the M&A market?

Historically, as inflation falls, merger and acquisition activity rises, and that’s because:

• Loans are less expensive.
  As inflation falls, financing tends to get less expensive, encouraging individuals to consider new investment opportunities.
• Businesses are looking to expand.
  In times of prosperity, businesses are looking to grow and acquire other companies.
• Deals are accelerated.
  When inflation and interest rates are higher, businesses tend to hold off on mergers or acquisitions. But once inflation and interest rates drop, the pent-up demand for M&As will ensure that businesses carry out buy/sell agreements quickly.

But there’s one thing we want to warn you about: Even though the inflation rate is falling, investors might not see changes to borrowing rates right away.

How long do borrowing rates lag behind monetary policy?

In mid-September, the Federal Reserve issued its first interest rate cut in over a year. It dropped the Federal Funds target rate 50 basis points, from a max of 5.5% down to 5.0%. Economists predict that it will continue to slash interest rates into 2025, ending the year at a projected 3.1%. When will businesses see this new monetary policy reflected in spending patterns and prices?

There is a long-held belief that there is a 12- to 18-month lag between monetary policy changes and changes in the market. Lowering the Federal Funds rate has always been seen as a way to fine-tune inflation. But recently, economists have been questioning that theory. Experts today believe monetary policy serves less as “a mechanical lever to control inflation” and more as a method to “affect the public psychology and bolster confidence in the institution.”

Technology will play a stronger role.

Some businesses use mergers and acquisitions as a strategy to acquire better technology. In fact, 64% of private equity firms said that acquiring other businesses was part of their strategy to implement artificial intelligence.

Artificial intelligence (AI) and other smart technologies can also help in the M&A process itself. Around 42% of M&A parties say they use generative AI to support the dealmaking process.

If you’re considering using M&As to acquire new technologies, or if you just happen to be acquiring a company that has smart technologies embedded in their operations and processes, take your time during the due diligence process. Here are a few potential snags:

• Valuations could be high.
  Companies that have implemented AI could be overvalued. In a report issued by The Carlyle Group last year, the authors showed a comparison of electric companies in the 1920s to AI-embracing companies of today. Like what happened in the 1920s, it’s possible that investors will aggressively bid up the valuations of AI-enabled companies simply because there is a desire to be an early-stage investor in these new technologies. That premium price may be worth it, but be cognizant of the role AI plays in those valuations.
• AI is unregulated.
  Right now, AI technology is unregulated in the US. When AI regulation ultimately gets implemented, how will that affect your business? Will you be able and willing to adjust your technology practices to comply with those new expectations?
• New security risks could develop.
  Whenever you implement new technology, you need to reassess your security risks. Smart technology used by a target company can expose the buyer to security risks they aren’t prepared to manage. This includes both in-house developed AI tools and in the use of publicly available AI tools.

M&A is seen as a less tenuous growth strategy.

Today, many see M&A transactions as a more effective way to accelerate growth and transform their business than organic growth. Organic growth can be difficult to achieve when the political landscape is so uncertain and when AI technology adoption can feel so risky. Instead of chasing after organic growth that relies on tenuous governmental policies, businesses may instead choose to grow by acquiring other businesses.

Get help with your M&A strategy.

There will always be reasons to delay refining your M&A strategy, but we encourage you to start today. Uncertainties won’t disappear, but a strong strategy factors them in, allowing you to make the best decisions with the available information. Contact us today to learn more about M&A strategies and techniques.