2021 has been the year of the merger. Coming through the back end of a global pandemic, the world of mergers and acquisitions (M&A) has responded in a record-breaking fashion. In just the first quarter of 2021, global mergers and acquisitions deal-making totaled 1.3 trillion (US) dollars, an increase of 94 percent compared to Q1 of last year. By October, worldwide M&A deals had surpassed 40,000 and 4.4 trillion (US) dollars. According to Refinitiv, a market data provider, this was the strongest opening nine months of any year since records began in 1980. This nine-month total beats 2015’s full-year record of 4.3 trillion (US) dollars. It is safe to say that the final quarter of the year will follow suit.  

The Rise and Fall of Interest Rates

As middle-market business owners, private equity firms and capital markets themselves continue to moderate recovery through the pandemic, there are a number of motivating factors behind the record-breaking surge in mergers and acquisitions transactions. Dean Wayne Rutley with Womble Bond Dickinson, a transatlantic law firm, mentions such things as “a healthy stock market, the availability of cheap debt, (record low) interest rates, and upbeat forecasts in such sectors as technology, healthcare, and financial services” as key factors. The Federal Reserve’s latest low market interest rates are of particular importance. According to federalreserve.gov, the central bank of the United States, known as the Federal Reserve (or Fed), was created by Congress in 1913 to help “provide the nation with a safer, more flexible and more stable monetary policy and financial system.” The bank helps to keep the US economy on track, especially through financial hardships. The Federal Reserve interest rate, also known as the federal funds rate, is a key part of ensuring a stable economy and is a major indicator of the state of the economy.  The economists at sickeconomics.com say “while interest rates can be defined as the price of borrowing money, they also are a factor in the supply and demand of credit. If the interest rates are low, firms and banks are incentivized to borrow and invest money, promoting a more dynamic economy. The interest rate is a figure by which the Federal Reserve lends money out to the banks, and banks then lend the money out later to the consumer with a slight profit margin.” The lower the interest rate, the more confident banks feel in lending money to their members and taking risks. The more money that is put into the economy, the stronger our economy will be, inspiring corporate confidence. The Federal Reserve is responsible for changing the rate at its own discretion based on the current or predicted state of the economy. A low-interest rate is a key factor in building confidence in banks, consumers, and businesses. With more cash in circulation, commercial banks and central banks are eager to lend and borrow funding which makes it easier for consumers to do the same. At the same time, lower interest rates can positively affect rates on credit cards, loans and savings accounts. If there is fear of an economic decline, the Federal Reserve will lower the interest rate, oftentimes more than once, to combat the downturn and encourage debt financing.  Currently, the federal funds rate is 0% to 0.25%, as of March 16, 2020. This historic low is the lowest rate since the financial crisis of 2008 and effectively the lowest the rate can go. The pandemic’s economic impact on the US economy is the driving force behind the latest emergency decreases in the benchmark interest rate. This summer the Fed announced it would keep the fed funds rate at a range of 0% to 0.25% until at least 2023, which is great news for business owners and consumers.  What happens when interest rates rise? The Federal Reserve will often raise the interest rate during a time of strong economic activity. The higher the interest rate, the less money that is circulated in the economy. Banks, consumers, and many companies are disinclined to borrow and issue debt because of the higher risk, which slows down the economy. This may sound strange but it is necessary to maintain a healthy economy. Personal finance writer Elizabeth Aldrich explains the reasoning behind the Federal Reserve’s decision to raise interest rates. She says, “Simply put, what goes up must come down, and the higher the economy climbs, the further it can fall. When rates are low and people feel good about the economy, consumers often take on excessive debt, and lenders may even lend too much money to unqualified borrowers. This leaves people, businesses, and banks in a precarious position when the economy inevitably slows down.” The highest the fed funds rate has ever reached was 20% in 1980 to combat double-digit inflation.  Aldrich goes on to say, “These (interest rate) changes can impact your wallet — low-interest rates are good for borrowers, while high-interest rates are good for savers.”

How Low-Interest Rates Affect Small Business Owners

The world of private equity firms (PE firms) and M&A, in general, is contingent on borrowing and lending money. Based on the record-breaking number of M&A deals conducted in 2021 and the amount of money changing hands between companies, it is safe to say that businesses are taking advantage of the current all-time low-interest rates. Aside from more money being put into the economy and higher returns on your investment, how do low-interest rates affect a company’s decision to merge with or acquire a competing company? Mergers and acquisitions deals can easily range from millions, tens of millions, to even billions of dollars so knowing the best way to finance these deals is paramount to the investors’ success. Members of the Florida Atlantic University Investors Association note that “mergers and acquisitions are able to be financed in multiple ways, including cash, debit, shares, and loan notes. How interest rates influence the type of payment vehicle used ultimately affects the corporate financing decisions made by companies- and understanding the borrowing cost involved is of massive importance during the M&A process.”  While interest rates are low, there is less risk in borrowing money and M&A dealings become more profitable. Companies that once seemed an unfavorable investment become more attractive to M&A firms and banks leading to increased M&A activity. This is a favorable scenario for both acquiring companies and companies pursuing consolidation.  As a small business owner, news of mergers and management buyouts between multi-million, even multi-billion dollar companies may not have a significant impact on you and your company. Even though it’s unlikely you will personally engage in such a mighty transaction (although never say never) there are still valid takeaways that you can apply to your own business dealings. Even mammoth companies prefer to borrow money from a bank to pay for acquisitions of new companies. The current low rates make this a desirable deal for both banks and businesses. Regardless of the size of your company, your money is important. Whether you are looking to buy out a competitor or seamlessly merge with a company with a shared passion, understanding how current low-interest rates can benefit you is vital. Capitalizing on a business loan with a low-interest rate to buy out or merge with another company can be a game-changing strategy for you and your wallet.  Since interest rates are not expected to rise before 2023, M&A activity will continue to soar. Now is the perfect time to consider the next step for your business. Succession Resource Group (SRG), the industry leader in succession planning for financial service professionals and small business owners, will help you value, grow and structure, protect and plan for the transition of your business in 2022 and beyond. SRG has valuable online resources, such as MyCompass and LendingWell, that are fine-tuned to understanding your business and meeting your needs.