FEBRUARY 12-18, 2016 SPECIAL ADVERTISING SUPPLEMENT TO THE TEXAS BUSINESSS JOURNALS
13th Annual Texas ACG Capital Connection 11
The Recent Federal Reserve Board Rate Hike: Little Immediate Impact on Middle Market Merger and Acquisition Activity
Brian Reed, CPA/ABV of Weaver The U.S. Federal Reserve System (Fed) announced in December it was raising interest rates by 25 basis points. That increase was the Fed’s first rate hike since 2006. The rate hike equates to shortterm interest rate increases in the .25 percent to .50 percent range for many loans. While the rate increase enables financial institutions to charge higher interest rates for various types of loans, the hike isn’t expected to significantly af-
Jacob Tate, CPA of Weaver fect purchases of automobiles, houses or many other products or services. The most substantial effect of the Fed’s announcement is the possibility the rate hike may indicate additional rate hikes in the near future, rate hikes that could have a greater impact on various industry sectors and the economy as a whole. The same can be said for the impact of the rate increase on merger and acquisition (M&A) activity within
the middle market. Considerable M&A deals involving firms with annual revenues in the $50 million to $1 billion range have occurred in recent years, and the Fed’s recent rate hike by itself is unlikely to curb that activity. The gradual nature of the economic recovery – in combination with the ability of companies to finance business expansion at low interest rates – means many firms have steadily accumulated cash to use for funding acquisitions. For companies that rely primarily upon stock and cash to finance acquisitions, the slight rate hike should not derail deals. In an interrelated global economy, the Fed’s recent rate increase strengthens the dollar, thereby making U.S. acquisitions more expensive for foreign purchasers. M&A activity involving U.S. and foreign firms, however, also hinges upon interest rate movements in overseas markets, making many deals contingent on economic factors beyond the Fed’s control.
Private equity (PE) firms rely upon substantial borrowing to finance acquisition targets. PE deals hinge more on financing costs than any other form of M&A activity, so the effect of the recent rate hike may be greater for PE firms than other firms seeking to make acquisitions. For PE firms and other companies mulling M&A activity, the major impact of the Fed’s December announcement may be that a nine-year run of no rate increases has come to an end. It remains to be seen whether the end of that run means that more frequent and larger rate increases will occur later this year or beyond. Brian Reed, CPA/ABV is the partner-in-charge of Weaver’s transaction advisory services and Jacob Tate, CPA is the director of due diligence services in Weaver’s transaction advisory services. Brian can be reached at Brian. Reed@Weaver.com or 972448-6936. Jacob Tate can be reached at Jacob.Tate@Weaver.com or 972-448-9210.
This ad appeared on page 11 of Section 2, VOL. 46, NO. 43 issue of the Houston Business Journal week of March 4-10, 2016. It has been reprinted by the Houston Business Journal and further reproduction by any other party is strictly prohibited. Copyrighted 2016 by Houston Business Journal, 5444 Westheimer, Suite 1700, 713-688-8811, http://houston.bizjournals.com