Q1-25: M&A Activity Stalling Amid Market Uncertainty
In the past year, we’ve closely analyzed how interest rates have shaped merger and acquisition (M&A) activity, particularly for financial investors. The persistently high interest-rate environment dampened dealmaking as the cost of capital increased substantively and valuation mismatches widened between buyers and sellers.
However, M&A activity began to rebound in the second half of 2024 and there was much optimism heading into 2025 that M&A activity would continue to rise. However, even as declining interest rates improved financing terms, the beginning of 2025’s uncertain trade and economic policy has spooked markets. What was looking to be the beginning of a rebound in dealmaking has abruptly changed course. Market uncertainty leads to deal inertia and according to PE Hub, January 2025 was the slowest start for dealmaking in the US in a decade with February 2025 even slower.
What was looking to be a rebound in acquisitions has abruptly changed course since the beginning of 2025.
Source: IMMA: Institute for Mergers, Acquisitions, and Alliances, St. Louis FED Economic Data
Market Fundamentals Show Favorable Dealmaking Environment
Easing Interest Rates
One of the primary reasons for optimism of a rebound in M&A activity among financial buyers was the market’s evolving view on interest rates in the second half of 2024. While SOFR rates have remained elevated compared to the near-zero environment in 2020-2021, rates stabilized then began to decrease at the end of 2024, lowering the cost of capital and making acquisition financing more attractive. In general, a more predictable cost of capital increases the willingness of private equity firms to pursue acquisitions.
Pent-Up Demand for M&A Dealmaking
Source: S&P Global Market Intelligence; Aggregate dry powder of global private equity funds with vintage years 2000-2024.
Private equity firms and corporate acquirers have amassed significant capital reserves over the past two years. According to S&P Global, in the first half of 2024, global private equity and venture capital firms amassed a multi-year high of $2.6 trillion in dry powder, reflecting substantial capital available for acquisitions. As financing conditions improve and valuations moderate, private equity firms that were previously on the sidelines should begin to target high-quality companies as acquisition candidates. For a more in-depth analysis of how private equity companies evaluate companies to acquire, download our Private Company Executive Team Playbook.
Valuation Resets Create More Seller Realism
As we’ve previously discussed, as rates rose dramatically in 2022-23, a significant gap between seller valuation expectations and buyer appetite developed. Many businesses that were considering selling were dissatisfied with valuations they received and chose to wait, adding to the slowdown in M&A deal activity. However, as time has passed and the rate market has stabilized, buyer and seller pricing expectations are becoming better aligned. The narrowing of this valuation gap is an important driver for restarting M&A transactions that had been put on hold.
Current Economic Uncertainty is Causing Dealmaking Inertia
Despite the dynamics outlined above, there is an uncertainty overhang in US trade and economic policy. Trade and tariff policies have had a whiplash effect on markets and the uncertainty creates dealmaking inertia. Investors rely on sophisticated financial modeling to value companies appropriately, but market instability creates stress on financial modeling assumptions. When there is market volatility, as we’ve seen in early 2025, most investors wait on the sidelines, opting to delay large transactions until markets stabilize.
Looking Ahead: A Measured Outlook
M&A dealmaking in early 2025 remain selective. Acquirers are focused on quality companies with strong financial discipline, solid cash flow, a diverse customer and supplier network, and relatively low leverage.
In a market where fundamentals are improving, but private equity M&A activity is subdued, preparation is key to maximizing value. With easing interest rates, pent-up demand, and valuation expectations becoming more closely aligned, we expect that there could be a flurry of M&A activity when the macroeconomic environment stabilizes. Now is the time to prepare your financial projections, make prudent operational efficiency decisions, and increase your company’s EBITDA so you are ready to take advantage of more favorable market conditions when they arrive. For a more detailed assessment, review our Top 5 Steps to Take When Selling your Business to position your company for success.
As always, the team at Keene Advisors will continue to monitor the trends shaping M&A activity and provide insights into the key factors driving market movements. Stay tuned for our next update as we assess how deal activity unfolds in the months ahead and don’t hesitate to contact us for a complimentary consultation to assess your company’s M&A readiness.
Keene Advisors is a Full-Service Strategy Consulting and Investment Banking Advisory firm with over $40 billion in M&A, Capital Raising, and Restructuring experience. We are dedicated to transparent communication and seamless guidance throughout every stage of the process, always aiming to align short-term needs with long-term goals.
Contact us today with your inquiries and to learn more about how we can help you achieve a successful sale.
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.