The recent rise in interest rates, as always, means different things to different market players. Savers should be happier (in principle, but not in practice!), borrowers will be paying more for their debt, and should be considering the longer term affordability of their capital structures.
If the economy continues to take steps towards a full recovery, both in the UK and globally, it is not unreasonable to assume that this is the first rate rise of a series over the coming years.
From our perspective, an increasing cost of money can have a key impact on M&A activity at the SME level: more strategic thinking and less 'buying spree' behaviour by large corporates. If a company's WACC* is creeping higher, then the money needs to work harder & smarter in order to pay for itself and generate an acceptable return.
Not only will investments likely be fewer, but they should also be more selective in nature. A clear strategic fit will need to be established, polished and defended to convince colleagues, the board, the shareholders and the banks that M&A activity is a prudent use of funds.
As believers in uncovering, honing and exploiting a strong, strategic rationale behind any potential deal, and thoroughly exploring the market to unearth the best one, we feel that our approach to transactions is well suited to serving a market that should become increasingly discerning.
*Weighted Average Cost of Capital - a key input to valuation and strategic review considerations.
The Bank of England has raised interest rates from 0.5% to 0.75% after much speculation. Expectations of a strengthening economy, solid employment levels, more consumer spending and the potential for wages to rise have all played a part in the decision.