Dealmakers grapple with the growing cost of capital

Global M&A markets are facing bruising headwinds, and American dealmakers are not sheltered from the storm. M&A activity in the Americas continued to slow over the first six months of 2023, having trended downwards through much
of 2022. The record levels of dealmaking seen in 2021 now seem a long way off.

Geopolitical uncertainty is on the rise, with Russia’s full-scale invasion of Ukraine continuing to create turmoil within global supply chains. Mounting tensions between China and the US have added to anxiety, despite recent efforts to repair political relations.

The economic backdrop is challenging, too: the International Monetary Fund (IMF) is predicting weak global GDP growth of just 2.8% in 2023, rising only to 3% in 2024. For advanced economies, the IMF’s forecast is for growth of just 1.3% and 1.4% in 2023 and 2024, respectively.

Interest rate strain

Steps taken by the US Federal Reserve to tackle rampant inflation continue to weigh heavily on dealmakers. The Fed’s Federal Open Market Committee raised interest rates on 10 consecutive occasions at its monthly meetings until taking
a pause in June.

Overall, rates in the US have climbed from zero to 5.25%, the highest cost of borrowing since 2007, just prior to the onset of the global financial crisis. Policymakers in Canada and Latin America have followed a similar trajectory.

The question is whether this aggressive approach to monetary policy will be sustained. Headline US inflation rates have come down sharply, but there are still concerns about persistently high core inflation. Economists across the Americas are engaged in similar debates. In Brazil, inflation fell back to within the central bank’s target range in May, but policymakers are divided about whether now is the time to begin easing back from interest rates of almost 14%.

With the cost of capital across the Americas so much higher—as well as other fears, including worry about antitrust interventions—the prospects for M&A in the region remain mixed. Deals are still getting done, but uncertainty and volatility are inevitably taking a toll.

Published in association with Datasite, Deal Drivers Americas provides and in-depth review of M&A activity in the first half of 2023, as well as an outlook for the rest of the year.

The report is also available on datasite.com.