Effects of monetary policy on UK M&A markets

Author: Max Jae, Analyst, Heligan Corporate Finance

Having joined Heligan Group two months ago as a Graduate Analyst, I was pleased to be asked to contribute a blog post to our ongoing series. I recently graduated from the University of Exeter, where I was fortunate to study Economics. Therefore, I have decided to combine my degree with my new role and write a blog post on how monetary policy affects M&A activity in the UK.

In 2023, the UK experienced a significant slowdown in M&A activity, with a year-on-year decline of 17%, a more substantial drop than the global aggregate, which sat at around 6%. The principal factors for this outsized decline include acute inflationary pains in the UK, which were the highest out of advanced G7 economies, in part caused by not being a member state of the EU, which allowed sharing of the inflationary burden and a much larger market to freely trade with, economic mismanagement from the Government for example from Liz Truss' "mini-budget" and significant effects to energy security as a result of Russia's war in Ukraine.

The UK has weathered some of the largest storms to date, with CPI inflation falling back to the BoE's target of 2%, energy security returning, and the incumbent Conservative Government, which had been in power for 14 years, being ousted in the 2024 General Election. With Sir Keir Starmer as the new Prime Minister, the Labour Party replaced the Conservative Government. Markets reacted positively as a result of renewed confidence in the political stability of the UK.

As a consequence of the improving macroeconomic indicators, the BoE recently made their first interest rate cut, from 5.25% to 5.00% and are expected to continue to cut rates, albeit not as quickly as they were hiked and ultimately not expected to fall back to the sub-1% levels experienced following the 2008 Global Financial Crisis.

The BoE's rate cut and future anticipated cuts should support more favourable M&A conditions. The effects can already be seen quantitatively, with the London Stock Exchange reporting that 'blockbuster' M&A deals more than doubled in Q1 of 2024. The market is reacting to the easing concerns around funding costs, inflation, and political uncertainty. These indicators and expectations around further rate cuts signal that the UK is likely on a trajectory for high deal volume in the remaining months of the year and going into 2025.

When compared to European peers, the UK has experienced the highest increase in deal volume and constituted the majority of M&A transactions in the region at the time of writing. Conversely, France (-25%) and Germany (-32%) have lower aggregate deal volume compared to 2023.

The National Institute of Economic and Social Research ("NIESR") forecast that interest rates will edge down slowly to 4.60% in 2025 and to 4.10% in 2026. A prolonged period of elevated M&A is expected going forwards, save for any major unforeseen black swan events, due to the lower levels of M&A activity over the past eighteen months having created pent-up demand and supply in deal opportunities.

Interest rates are a key macroeconomic factor influencing M&A activity. While economists are optimistic, we would advise investors to proceed with caution, given that the UK has only recently returned to stability and considering the state of the leading global geopolitical and economic indicators.

Writing this blog and examining how recent developments have impacted M&A activity has been interesting. Looking ahead, it will be interesting to observe how the market evolves over the next 18 months. Could the changing economic conditions and shifting trends significantly change the M&A landscape? What are your thoughts on what might happen?