The New M&A Reality

The era of near-zero interest rates that fuelled a decade-long M&A boom in the UK is over. The Bank of England's base rate, which sat at 0.1% as recently as December 2021, has settled at levels not seen since before the 2008 financial crisis. This fundamental shift in the cost of capital has transformed the economics of corporate acquisitions.

UK M&A deal volume fell 35% in 2023 from its 2021 peak, and while activity has partially recovered, the deals being done look fundamentally different from those of the cheap money era. Leverage multiples have compressed, earn-out structures have become more common, and strategic rationale faces far greater scrutiny from boards and shareholders.

Valuation Discipline Returns

Higher interest rates have restored valuation discipline that eroded during the period of abundant, cheap capital. When borrowing costs are near zero, the present value of future cash flows is mathematically inflated, justifying higher acquisition multiples. As rates rise, those same future cash flows are worth less today, compressing rational bid prices.

This is broadly positive for UK companies pursuing strategic acquisitions. Targets that were prohibitively expensive at 15x EBITDA are now available at 10-12x, and sellers who would previously have held out for premium prices are more willing to transact at realistic valuations.

Private equity firms, which dominated UK M&A during the cheap money era, are finding it harder to make leveraged deals work at current interest rates. This has reduced competition for acquisitions, creating opportunities for corporate buyers who can fund deals from operational cash flow or modest leverage.

Strategic Rationale Takes Centre Stage

In a low-rate environment, financial engineering could mask a weak strategic rationale. Cheap debt allowed acquirers to generate acceptable returns from deals that created little operational value. With higher rates, every acquisition must demonstrate clear strategic logic — revenue synergies, cost savings, capability acquisition, or market position — to justify the cost of capital.

UK boards are asking harder questions about proposed acquisitions: What specifically can we do with this business that others cannot? How quickly and reliably can we realise synergies? What are the integration risks and how will we manage them? These questions were always relevant, but higher capital costs have raised the consequences of getting the answers wrong.

This scrutiny is producing better deals. Research from Cass Business School shows that UK acquisitions completed since interest rates rose have, on average, created more shareholder value relative to premium paid than deals completed during the low-rate period. Discipline, it seems, is good for deal quality.

Alternative Deal Structures

Higher interest rates have also driven innovation in deal structures. Earn-outs, where a portion of the purchase price is contingent on the acquired business meeting performance targets, have become standard in UK mid-market M&A. This structure reduces upfront capital requirements and aligns the interests of buyers and sellers.

Joint ventures, strategic partnerships, and minority investments are increasingly being used as alternatives to full acquisition. These structures allow companies to access capabilities and markets without the full capital commitment and integration risk of acquisition.

Deferred consideration, vendor financing, and equity-based deal structures have also become more common as buyers seek to minimise the impact of higher borrowing costs on transaction economics.

Positioning for the Next Cycle

UK companies with strong balance sheets and disciplined acquisition strategies are well positioned for the current environment. The combination of compressed valuations, reduced competition from leveraged buyers, and greater seller willingness to transact creates opportunities that disciplined acquirers have not seen in over a decade.

The key is patience and preparation. Companies that maintain active pipeline management, conduct thorough due diligence, and have clear integration playbooks will be able to move quickly when the right opportunity emerges. In M&A, the returns go to the prepared.