Q1’24: Understanding the Link: How Interest Rates Influence Mergers & Acquisitions by Financial Investors
Financial investors like private equity funds and venture capital firms help shape the market dynamics of mergers and acquisitions (M&A) across many industries. But as interest rates have risen precipitously since 2022, there has been a significant decline in the M&A activity among financial investors. What should companies do who are looking for an exit?
Traditionally, financial investors like private equity funds and venture capital firms have played a big role in shaping the market dynamics of mergers and acquisitions (M&A) across many industries. If the acquisitions are funded by debt, however, the acquisition valuation is sensitive to the interest rate environment as current rates drive the cost of capital that is necessary to finance the transaction. This isn’t to say that strategic and corporate acquirers are not impacted by the interest rate environment - they are. But strategic buyers generally have multifaceted rationale for acquiring another company based on its existing or future products, perceived economies of scale, or navigation of their competitive landscape that extends beyond the acquisition’s pure financial return.
As Rates Rise, M&A Activity Drops
Not surprisingly, as interest rates have risen precipitously since 2022, there has been a significant decline in the M&A activity among financial investors. Expectations for declining rates have shifted as the Federal Reserve plans to maintain higher rates longer due to persistently high inflation.
Source: IMMA: Institute for Mergers, Acquisitions, and Alliances, St. Louis FED Economic Data
We can see, with the exception of the market freeze during Covid lockdowns, that when interest rates were extremely low, M&A activity by financial investors increased rapidly and stayed elevated at between $400-$630 billion in quarterly acquisition volume. Since then, deal volume decreased to less than half that amount and was only $180 billion for the first quarter of 2024.
For companies hoping to be acquired in the near future, there is reason to be optimistic. EY-Parthenon predicts a gradual recovery in private-equity backed M&A through the second-half of 2024. Companies that have low-leverage, strong cash flow generation and robust EBITDA growth will be particularly attractive acquisition candidates.
Understanding the macroeconomic environment and making strategic investment and operational decisions today will prepare your company to take advantage of accelerating acquisition activity when interest rates and the cost of capital begins to decrease. The team at Keene Advisors offers deep strategic and financial analysis and planning to optimize your team’s performance and prepare for future inflection points. Contact us today for a complimentary consultation and we can discuss how to tailor solutions to meet your company’s needs.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.
Overview of Vital Farms’ Initial Public Offering
Overview of Vital Farms’ IPO: how a B Corp offering pasture raised products went from startup to the public markets. A look at private equity deal making amid COVID-19.
Vital Farms, a Certified B Corporation that offers a range of pasture-raised food products nationwide, completed an initial public offering (IPO) on August 4th, 2020.
The company boosted its opening stock price, initially planned between $15 and $17, to $22, and the underwriters exercised in full their option to purchase additional shares. Vital Farms’ IPO comes at a time when the ongoing coronavirus pandemic has caused a slowdown in IPO activity, with a 19% decline in deal volume and 8% decline in proceeds in the first half of the year compared to the same period in 2019.
Vital Farms had previously raised an estimated $40.9 million from private investors, including SJF Ventures, Arborview Capital, Sunrise Strategic Partners and Manna Tree Partners. A $25 million round raised in 2018 valued the company at approximately $136 million.
Vital Farms is a leading U.S. brand of pasture-raised eggs and butter by retail dollar sales. Its pasture-raised products, including shell eggs, butter, hard-boiled eggs, ghee and liquid whole eggs, are sold in approximately 13,000 stores nationwide. The company is focused on the humane treatment of farm animals and sustainable farming practices, as well as the long-term benefits of each of its stakeholders, including farmers, customers, communities, the environment, crewmembers and stockholders.
At the close of its first day of trading, Vital Farms stock was up nearly 60%, with stock selling at $35, up from its initial price of $22.