Inflation – A friend or a foe in the field of mergers and acquisitions?

Inflation is familiar front page news.

Every day the media outlines the risks and dangers of cost increases, which are now said to be tracking at around five per cent according to the Bank of England and forecasts suggesting it could top seven per cent in the spring.

Inflation on face value is an issue, with our capital not stretching as far and demand likely to recoil in some quarters. Energy sector issues are one of several factors contributing toward this, with the post-COVID-19 bounce in consumer activity another.

From a corporate acquisition perspective however, the outlook is not all doom and gloom.

We have entered 2022 with momentum unmatched by previous years and with pipelines generally stacked with opportunity. Capital remains available and exchange rates make UK assets continually attractive to overseas buyers.

Therefore, what does inflation likely mean for activity levels?

From a risk perspective there is a lot to contend with – cost growth attached to labour and energy will need to be projected and margins scrutinised to ensure they are as robust as possible. Similarly, working capital and the attached sources of funding will need to be reviewed as the perhaps inevitable interest rate increases will further impinge on ultimate profit and cash generation.

Inflation should also attach to company valuation, and where an acquirer has a holding cycle of, for example, three to seven years, the compound effect could see returns amplify handsomely.

Assuming interest rate exposure is appropriately merged, leverages will further enhance return profiles for those acquirers with debt capacity.

Inflation, while a risk factor which demands diligence and contemplation, should not be seen as ‘all bad’ and savvy buyers could benefit from this in the coming periods.

Financial forecasting, scenario planning and prompt responses to changing macro-economic factors will all be needed – alongside advice from those on the front line who have greater visibility of what may lie ahead.

Lee Humble is an associate partner at MHA Tait Walker Corporate Finance and has more than 15 years of professional services, banking sector and corporate finance experience, having spent time in London and the North West. For more information, please call 0191 285 0321 or email [email protected].