M&A cycles

Mergers and acquisitions (M&A) is companies buying, selling and combining with each other. Deal activity rises and falls in waves, and those waves shape how busy investment banks, law firms, private equity firms and advisory teams are. Understanding the cycle helps you talk about why deals happen when they do.

What drives deal activity

• Confidence: boards buy when they feel sure about the outlook for their business
• Financing: cheap, available debt makes it easier to pay for acquisitions
• Stable valuations: buyers and sellers agree on price more easily when share prices aren't swinging
• Private equity money: funds that have raised capital need to invest it within a few years
• Strategic pressure: technology change, slowing growth or rivals combining can push companies to act

When these line up, activity builds. When interest rates rise quickly, markets turn volatile or the outlook darkens, buyers and sellers disagree more about value and deals get delayed or abandoned. Activity often picks up again once financing costs and valuations settle.

Why interest rates matter so much

Private equity firms usually fund buyouts with a large share of debt. When borrowing costs rise, the same debt costs more in interest, which leaves less cash to pay it down and lowers the return. To keep returns up, they borrow less or offer a lower price, and sellers may prefer to wait.

Corporate buyers with strong balance sheets are less affected, because they can pay with cash or shares. That's why strategic deals can hold up better than buyouts when rates are high.

UK features worth knowing

• Bids for UK listed companies follow the Takeover Code, run by the Takeover Panel, with strict timetables
• Once a possible bidder is named, it generally has 28 days to make a firm offer or walk away, known as put up or shut up
• The Competition and Markets Authority can review deals that might reduce competition
• The government can review deals in sensitive sectors such as defence and energy under the National Security and Investment Act
• When UK companies trade at lower valuations than overseas rivals, they can attract bids from overseas companies and private equity

Signals to watch

• The number and value of announced deals, compared with the same period a year earlier
• Conditions in the leveraged loan and high-yield bond markets, where buyouts are financed
• Whether companies are listing their shares, since a busy listings market signals confidence
• How much money private equity funds are raising and holding
• Big deals in one sector, which often prompt rivals to respond