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While the mergers and acquisition market plodded along for the last two years, it has steadily gained steam throughout 2024 and could get a boost if interest rates start to come down this month.
Although perspectives differ on how much rate cuts could affect M&A activity, professionals who work on transactions say the rate hikes since early 2022 have certainly weighed on deal flow.
It’s widely expected that the Federal Open Market Committee (FOMC) will begin easing monetary policy when it meets this week. If that happens, the M&A market could benefit from the lower cost to finance deals, and from more sellers and buyers getting into the market.
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“I don’t think it’s particularly slow now. It’s only going to go up as rates come down and money becomes cheaper,” said Josie Boucher, a partner in the business practice group who leads Warner Norcross + Judd LLP’s Kalamazoo office.
Josie Boucher, Warner Norcross + Judd
“Everyone that I’ve spoken to is pretty confident that the Fed is going to start lowering rates, and we’re anticipating that that is going to bring some more activity to the market as buyers have access to cheaper capital,” Boucher told Crain’s Grand Rapids Business. “I think things are going to pick up even more than they are now, and there will be better valuations for sellers because the money’s not going to be quite so expensive for buyers. They’re going to have more negotiating room on the valuations, and that may bring more sellers to the market as well.
“We’re really looking forward to a busy 2025. It should be a good year.”
‘Wind in the sails’
Economists generally expect the long-anticipated interest rate cuts to begin once the FOMC meets on Tuesday and Wednesday of this week.
In a recently updated U.S. economic outlook, University of Michigan economists predicted that the FOMC will begin reducing interest rates this month and that cuts will continue at every meeting through May 2025.
Jeff Korzenik, Fifth Third Bank
Jeff Korzenik, chief economist at Fifth Third Bank, is certain that the FOMC will begin cutting rates this month as inflation eases and the national job market cools, which is stoking concerns about a downturn in 2025.
“The easing is finally here; the magnitude of easing it still a little bit of a question,” said Korzenik, who “leans a little more” toward the FOMC making a half-point rate cut next week and possibly implementing a “long string of gradual cuts.”
While rate cuts tend to take 10-12 months to affect the economy, the lower rate environment “should put a little wind in the sails” of the M&A market that has pent-up demand and has been weighing some uncertainty from the presidential election, Korzenik said.
“The Fed’s easing, coupled with the clarity of the election, eventually, I think is a combination that’s going to be very positive for the M&A market,” he said.
Betting on the bounce
Interest rate cuts would begin as M&A activity has held steady, if not inched upward this year, according to M&A professionals that Crain’s Grand Rapids Business contacted for a perspective on the market. They described how activity has been slower in the last couple of years, dampened by rising interest rates as well as economic and political uncertainty, while lower business valuations have kept sellers on the sidelines.
“We’ve been really steady this year,” Boucher said of M&A activity among Warner Norcross + Judd’s clients. “Certainly, not as crazy as a few years ago, but we’ve seen a steady stream of deals.”
Peter Roth, Varnum
This year started with a slow market and gradually improved as the year progressed, said Peter Roth, an M&A attorney and partner at Varnum LLP in Grand Rapids. Deals have been taking longer to get done, with fewer buyers and fewer bidders when a company goes through an auction process, he said.
High interest rates “haven’t helped” deal flow, and buyers are going through deeper due diligence than a few years ago, he said. As interest rates rose since early 2022 to their present highs, “some people have sat on the sidelines,” according to Roth.
“Some buyers are just like, ‘Look: There’s uncertainty in a lot of things in the world and interest rates are high. Why do a deal now? Why not wait and do a deal a year or two from now?’” Roth said. “Over the course of the year, there’s been kind of a wait-and-see (mood) on when will rates really start to come down.”
When the Fed starts to cut rates and deal financing costs begin to come down, prospective buyers who have been on the sidelines the last two years might start getting active, he said.
“I also think people that are in the market just might become more aggressive, thinking that the cost of capital is starting to go down — and it looks like it will really go down over the next year. Maybe they want to get into the market on the front end before everybody else does,” Roth said. “I think (the M&A market is) going to see a bounce. The rates will mostly impact buyers’ interests, but if there are more buyers, then sellers start to go, ‘OK, there’s a better market’ and they start hearing from the investment bankers and the lawyers.”
Small business distress
Nationally, the M&A online marketplace BizBuySell.com in July reported a 5% increase in small business transactions from a year earlier. Deals rose 3% on a quarter-over-quarter basis.
Max Friar, Calder Capital
Activity for Grand Rapids-based Calder Capital LLC through August has been “very consistent” with 2023, although small business M&A “has probably been getting more difficult,” Managing Partner and owner Max Friar told Crain’s Grand Rapids Business.
As the economy gradually slowed from the effects of high interest rates, business performance also trended lower in 2024, which could potentially drive more sellers to the market in the coming year, Friar said. He’s seeing higher rates of distress among small manufacturing companies in the Midwest.
“Buyers are still very aggressively going after quality businesses, and I continue to feel like there are fewer quality businesses for sale. It is still a seller’s market if your business is performing on a stable basis or it’s growing,” Friar said. “On small businesses, a lot of them are grappling with things being tougher right now, and that’s just going to feed into further exhaustion. There are a lot of folks that have just held on through COVID and held on too long, and I feel like they’re going to make a decision.
“I think 2025 should be a year of a lot of transactions driven by sellers coming to market. It might be more balanced from a buyer’s and seller’s perspective.”
Still, a reduction in interest rates “by itself isn’t going to move things in the market any more quickly,” Friar said. “While any downward movement won’t hurt, I think a more substantial rate cut — like a 0.5% drop in September — could provide a meaningful boost to the market. However, I don’t believe rates will decrease enough to significantly invigorate the market in 2025.”
Wait and see
The M&A market does “feel like it’s been getting better” throughout 2024, with an uptick in activity at the start of the year, said Yasmeen Jasey, the Michigan market executive for Citizens Bank. Jasey said the lender is “very optimistic that M&A is going to continue and make steady progress for the remainder of the year.”
Yasmeen Jasey, Citizens Bank
“We actually anticipate that that momentum through the end of the year will carry into 2025,” she said.
Jasey believes the FOMC next week will cut the benchmark federal funds rates by at least a quarter point, creating “additional optimism” in the market. She notes that the current M&A landscape is clouded by players waiting for rates to decline and to get past the election to execute a deal.
“Everyone’s waiting for what’s going to happen with the rate environment, but that’s coupled with the fact that you have this geopolitical uncertainty that’s going on and a contentious election cycle. Both of those tend to pose a little bit of cautiousness,” Jasey said. “As we’re talking to folks in Michigan, it’s not that they got out of the market, it’s that they’re waiting. They’re waiting, they’re collecting data, they’re being more diligent to make sure that they’re acting and reacting to the market appropriately.”
Mike Brown, Charter Capital Partners
When interest rates start to come down, “it will have a big psychological effect on the sellers and they’ll be more willing to go to market with their business,” said Mike Brown, a partner at Charter Capital Partners, a Grand Rapids-based M&A firm. However, rates will have to keep coming down over a period of time to really affect the market, Brown said.
A steady decline in rates in the coming months will help the M&A market “quite a bit,” Brown said.
“A quarter point really doesn’t move the needle all that much,” he said, noting that deal flow for Charter Capital Partners has been “pretty choppy” this year.
When rates do start to decline, the effects on the M&A market won’t come for another five or six months because of the time it takes to work through a transaction, Brown said. He anticipates a rise in closings in the first quarter of 2025.
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