Big Law M&A Market Sees Reboot on Possible Interest Rate Easing

The possibility of easing of interest rates is bringing a whiff of optimism to Big Law merger and acquisition operations hungering for activity this year.

Investors see rates peaking at 4.9% in May and then falling by a full percentage point through January, Bloomberg data showed Monday. Cuts would help shake the doldrums from an M&A market where deals are down 50% from last year.

“If your deal is contingent upon getting debt financing in place at closing, certainly lowering the rates is going to make that more attractive,” said Scott L. Allen, co-chair of Morris, Manning & Martin’s private equity practice. “Private equity funds are going to be able to get a more attractive return on their investment.”

As the Federal Open Market Committee opens a two-day meeting Tuesday, most economists forecast a quarter percentage point increase in the benchmark rate Wednesday. However, global financial pressures have prompted some Fed watchers to predict a pause in hikes.

Big Law M&A operations, while straining to handle a boom in work in 2021, watched deals fall by a third last year. Transaction levels fell further this year as the Fed continued rate hikes begun in 2022 and as financial sector turmoil grew with the collapse of Silicon Valley Bank and three others.

But the backlog of companies ready to buy and sell—and the dry powder private equity firms have been sitting on—could mean that the market is poised for an uptick in deals in response to more favorable interest rates.

“There’s a segment of the population that’s waiting for peak interest rates,” said Christopher Keefe, a partner at Nixon Peabody, who said a deals increase could be visible by the fourth quarter. “When the Fed indicates that they’re going to start to hold the line or ease a little bit, you’ll see some additional stuff coming out of the woodwork.”

There have been hopeful signs. Pfizer Inc. on March 13 said it’s purchasing cancer-drug maker Seagen Inc. for an enterprise value of $43 billion, making it the biggest deal so far this year. Wachtell, Lipton, Rosen & Katz advised Pfizer, while Sullivan & Cromwell guided Seagen’s board.

Denver-based gold producer Newmont Corp. last month offered to buy Newcrest Mining Ltd. in Australia for $17 billion. King & Wood Mallesons and White & Case are Newmont’s legal advisers.

Financing Risk

Companies in the past six months have laid the groundwork for transactions as they hunted for financing, said John Grand, co-head of the M&A and capital markets practice at Vinson & Elkins. The high cost of borrowing made it difficult to close deals, he said.

“In the past six months, a trend we’ve seen is a number of these deal processes don’t take,” Grand said. “Companies look for alternative financing.”

Market conditions will allow for a stronger flow of deals later this year, said Eduardo Gallardo, co-chair of the M&A practice at Paul Hastings. Activity, however, won’t match the soaring levels of 2021, he said.

Fear in the market is keeping investors and companies on their toes, Gallardo said. “The big concern right now is whether there are other SVBs out there,” he said, noting that the Fed may not be able to intervene to rescue others.

It will be difficult for small companies to catch up with the deals market even if there is a respite in interest rate hikes, said George Singer, a corporate finance partner at Holland & Hart.

One reason is the crash of SVB, he said. The bank was a popular lender to technology startups that may not otherwise qualify to borrow from traditional banks, Singer said.

“Venture capital is going to be less available because of SVB,” he said. “That creates stress for early stage companies that aren’t well capitalized.”