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How Could Rising Interest Rates Affect My Acquisition Plans?

December 5, 2017 acquisition

November saw UK base interest rates rise for the first time in a decade, albeit the most modest of increases from 0.25% to 0.5% - which only reverses the drop in rates we saw in August and puts the rate back to where it was for the previous seven years.

The Bank of England governor Mark Carney has stated that interest rates will likely rise again at least twice more over the coming three years, with the rate expected to eventually hit 1%. The UK economy is predicted to see growth of 1.7% over the same time. With inflation hitting a 5-year high of 3% in September, the Bank of England decided that rate changes will be necessary in the coming years to reduce inflation back toward its target of 2%.

Expert economists don’t foresee the rise having a detrimental impact on the economy, as rates are still maintaining the comparative historical lows we have had since the financial crisis. However, if the trend continues, higher rates will bring about an end to the era of cheap borrowing that has predominated for the past decade. That in turn will have a knock-on effect on how businesses finance their growth and acquisition plans

The impact on corporate finance

Should the Bank of England follow its expected course, commercial mortgage rates will rise, especially for those with a variable rate. This will put a squeeze on the ready cash businesses have to invest elsewhere. On the other hand, businesses with a surplus of extra cash should see a rise in returns from better interest rates.

Higher interest rates will also cause the pound to appreciate in value, making exports more valuable and imports cheaper. The aim is also to push down inflation, helping businesses to control their overheads. So overall, a gradual rise in interest rates should have a neutral impact on corporate finances.

The impact on mergers and acquisitions

The fear with interest rate rises is that the increased cost of borrowing puts businesses off investing, which has a cooling effect on the economy overall.

The main impact that interest rates have on mergers and acquisitions is on the price that a company is willing to pay to acquire another business. As interest rates increase, so do loan prices to finance deals. There is therefore less money on the table for the company being bought out. This has the potential to cause a slowdown in business sales and acquisitions, if the companies being considered for purchase are not willing to accept a lower price.

But in practice this depends on how fast rises in interest rates happen. A slow rise combined with a strengthening economy should not have a detrimental impact. It is sudden, large rate hikes which spook investors and increase volatility for some time.

Business capital is higher than it has been in a long time, both in terms of cash held by companies and also private equity capital. This may buffer interest rates, as businesses are able to draw from cash on hand rather than borrowing at higher costs.
Also, if the positive effects of gradual interest rate rises inspire greater confidence overall, that could act as a spur rather than a restraint to the acquisitions market. 

Thinking about getting on the acquisition trail? Learn more about how our corporate finance services can set you on the right path.