“Expectation gaps” impacting M&A, but deal volume on the rise

Persistent high interest rates and rising inflation have led to “expectation gaps” arising between buyers and sellers that are impacting M&A transactions, with significant gulfs between what buyers would like to pay and prices that sellers would be willing to accept.

That’s according to recent comments from Mazars’ Head of London M&A Paul Joyce, who said that repeated interest hikes from the Bank of England and continuing inflationary pressure had impacted the cost and availability of debt.

Joyce claims that this has had a knock-on effect on the cost of capital for M&A buyers, which has in turn impacted expected returns. As expectation gaps widen, Joyce warned, M&A deals can become harder to execute, with a particular impact on investors such as private equity firms, who often fund deals with a high proportion of debt and place great emphasis on expected returns when identifying acquisitions.

Joyce commented: “A prolonged period of low interest rates and high demand for acquisitions has set sellers’ value expectations at historically high levels – conversely, the increased uncertainty in the financial markets have caused buyers to become more cautious. This combination has caused the ‘expectation gap’ to widen significantly over the last six months.”

However, while these factors have contributed to a decline in deal values over the past year (with EY reporting that UK deal value fell from £11.5bn during H1 2022 to just £4.6bn in H1 2023), M&A activity has increased, with a 16 per cent increase in deal volumes.

Joyce said that the risks of company ownership, the impact of COVID-19 and the financial challenges facing businesses had led to many owners considering succession options. He added: “Rising interest rates and the risk of changes in government policies, particularly related to capital gains tax, have also played a role in influencing business owners to consider crystallising value through full or partial exits.”

Other drivers of M&A activity, according to Mazars, include a high volume of dry powder at private equity firms – which should see strong M&A activity continue into 2023 – and technology, with PE and venture capital investors targeting disruptive, high-growth businesses.


Read more about current M&A trends:

M&A disputes are a growing issue – How can they be prevented and resolved?

Retail M&A hits 5-year high, but distressed deals fall

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