M&A in Motion: Navigating Inflation, Interest Rates, and Market Turbulence
By M&A Leadership Council
The Boom, The Bust, and The Bidding Wars
In 2021, dealmakers were in a frenzy—record-low interest rates, cheap debt, and soaring valuations fueled one of the hottest M&A markets in history. Fast-forward to today: inflationary pressure, rising borrowing costs, and market uncertainty have turned once-aggressive acquirers into cautious negotiators.
The question isn’t if M&A will continue—it always does—but how dealmakers can adapt to an unpredictable economic landscape. Those who fail to adjust will watch opportunities slip away, while the smartest strategists will capitalize on market distortions.
Let’s break down how inflation, interest rates, and market dynamics are reshaping M&A playbooks.
Inflation: The Silent Value Killer
Inflation erodes purchasing power, increases input costs, and wreaks havoc on financial forecasting. In M&A, this leads to two critical consequences:
- Unstable Valuations: Future earnings projections become unreliable, making it harder to justify high multiples. Buyers demand discounts, while sellers cling to past valuations.
- Strained Profit Margins: Businesses with weak pricing power struggle to pass higher costs onto consumers, making them less attractive targets.
The Consumer Goods Conundrum
In 2022, consumer goods giant Unilever faced criticism for paying a hefty premium for a health and wellness brand just before inflation spiked. The target’s input costs surged, eroding its profitability overnight. Investors balked at the deal, sending Unilever’s stock tumbling.
The Retail Repricing Effect
Walmart and Target, historically conservative acquirers, became hesitant about new deals in 2023. Why? Inflation had made cost forecasting nearly impossible. Kohl’s, which had multiple acquisition suitors in 2022, saw all bids collapse as inflation uncertainty crushed buyer confidence.
Insight: Smart acquirers are shifting focus to companies with strong pricing power—those that can raise prices without losing customers. Think software firms with subscription models rather than manufacturers with razor-thin margins.
Interest Rates: The Cost of Capital Just Got Expensive
Rising interest rates affect M&A in two key ways:
- Higher Debt Costs: Cheap, leveraged buyouts (LBOs) are no longer viable at scale. Private equity firms, once comfortable using 70%+ debt to finance deals, now rethink their strategies.
- Stricter Return Hurdles: Companies must justify acquisitions with clearer synergies since borrowing is no longer “free.”
The Private Equity Slowdown
In 2023, several high-profile private equity deals collapsed at the eleventh hour. The reason? Debt financing costs ballooned, making once-attractive IRRs (Internal Rate of Return) unworkable. Instead of overleveraging, PE firms pivoted to minority stakes, joint ventures, and all-equity deals—a dramatic shift from their aggressive pre-2022 playbook.
Elon Musk’s Twitter Takeover Struggles
Musk’s $44 billion acquisition of Twitter (now X) in 2022 became a cautionary tale about interest rate risk. The deal relied heavily on $13 billion in debt financing—a figure that looked manageable in early 2022 but became a nightmare as interest rates soared. The result? Twitter is now paying over $1 billion annually in interest costs, severely limiting its ability to reinvest.
Insight: Corporate acquirers with cash-heavy balance sheets now have the upper hand. Strategic buyers willing to pay in stock or assume minimal debt are outmaneuvering PE competitors.
Market Uncertainty: The Fear Factor in Valuations
Economic downturns introduce a paradox: while struggling businesses offer discounts, uncertainty makes buyers hesitant. Key concerns include:
- Volatile Earnings: Cyclical industries (retail, travel) become riskier bets.
- Regulatory Changes: Governments tighten scrutiny, adding deal delays and compliance hurdles.
- Recession-Proofing: Buyers prioritize resilient industries like cybersecurity, healthcare, and infrastructure.
Tech M&A’s Mixed Signals
Tech valuations have plummeted, but not all tech deals are dead. Adobe’s $20 billion acquisition of Figma in 2022 (amid market turbulence) stunned analysts, given the hefty price tag. However, the logic was clear: Figma’s recurring revenue and customer stickiness made it an outlier in an otherwise declining sector.
The Biotech Buying Spree
While most industries slowed down, biotech M&A surged in late 2023. Why? Large pharmaceutical companies, flush with cash, saw the downturn as an opportunity to scoop up undervalued biotech firms. Pfizer’s $43 billion acquisition of Seagen was a perfect example—the pharma giant bet on long-term growth while others hesitated.
Insight: Buyers must separate true value from temporary distress. Smart dealmakers are leveraging earn-outs and contingent payments to hedge risks.
Mastering M&A in a Shifting Economy
Economic uncertainty isn’t a reason to stop deals—it’s a reason to improve them. The old playbook won’t cut it in today’s market. Smart dealmakers are adapting, not waiting.
Opportunities still exist, but they require sharper analysis, creative structuring, and a redefined view of value. Here’s how top acquirers are staying ahead:
1. Lean on Creative Deal Structures
Rigid deals don’t work in volatile markets. Up-front cash payments and heavy leverage increase risk. Instead, acquirers are using earn-outs, milestone-based payouts, and stock-based transactions to hedge against uncertainty.
By sharing both risk and upside, buyers can protect themselves while keeping sellers invested in long-term success.
2. Target Recession-Resilient Sectors
Some industries weather downturns better than others. High-margin, subscription-based businesses, healthcare, and cybersecurity remain stable, while retail and capital-intensive sectors struggle.
Shifting focus to resilient industries with strong pricing power helps buyers secure high-value deals without excess risk.
3. Capitalize on Distressed Assets
Market downturns create unique openings for bold buyers. Distressed assets, carve-outs, and undervalued businesses offer long-term value—but only to those who can handle volatility.
The key is distinguishing between a temporary setback and a failing business. Smart acquirers strike early before the competition returns.
Economic downturns create unique openings for strategic buyers and private equity firms willing to invest in businesses that, while temporarily struggling, have strong underlying fundamentals. The key is distinguishing between a temporary slump and a terminal decline.
M&A never stops—it just shifts. The best acquirers recognize when to adapt and when to strike.
If you’re still using yesterday’s strategy in today’s economy, you’re already behind.
We invite you to attend "The Art of M&A® Due Diligence: Discovering Risk and Confirming Value in the Diligence Process" - a highly interactive virtual course where you can ask questions, come to conclusions, and find out how other M&A professionals make decisions. May 13-15, 2025 for three half-days, via MS Teams.
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