Lower rates may spur higher levels of M&A activity in coming quarters By Investing.com

Lower interest rates could lead to an increase in mergers and acquisitions (M&A) activity in the coming quarters, strategists at Wells Fargo said in a recent report.

The investment bank notes that M&A activity remains below long-term averages, but showed a modest improvement from the lows seen in early 2023. This increase is partly attributed to growing confidence that the Federal Reserve can achieve a softer economic landing gentle.

In addition, the increasing likelihood of interest rate cuts beginning in late 2024 and continuing through 2025 fueled optimism among investors that deal activity could increase as financing conditions become more favorable.

In most mergers, the acquiring company usually offers a premium over the target company’s current stock price. While most of the price difference (or difference) between the offer price and the going price closes quickly after the announcement, some of the premium usually remains, contingent on the successful completion of the merger.

According to Wells Fargo, most merger arbitrage strategies aim to capture this post-announcement spread.

“Key drivers of these strategies include the size of the residual premium, the time required to complete the merger and the risk that the merger will not be completed,” the strategists said.

“Current premiums and time to close have remained in line with long-term averages, but deal activity has been slow to pick up,” they added.

They suggest that the current environment of high interest rates, along with a lack of confidence from corporate leaders and sluggish economic growth, could be contributing factors to the slow pace of deal activity.

“We continue to look for green shoots, and a more accommodative financing environment could be sufficient to generate higher levels of activity in the coming quarters,” the note concluded.

Fed Chairman Jerome Powell signaled on Friday that interest rate cuts are on the horizon, though he refrained from specifying the timing or extent of the cuts.

“The time has come for policy to adjust,” Powell said during his keynote speech at the Fed’s annual conference in Jackson Hole, Wyoming.

“The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

As markets looked for clues about future monetary policy, Powell looked at the factors that led to the Fed’s 11 rate hikes between March 2022 and July 2023. He also acknowledged progress in reducing inflation, indicating the Fed may was now paying equal attention to maintaining full employment.