Navigating strategic growth: Understanding the role of interest rates in M&A and IPO

Abstract

The engine of sustainable growth and competitive dominance in the corporate world demands audacious strategy. Among the most potent and intricate plays are mergers & acquisitions (M&A) and initial public offerings (IPOs). These milestones in companies’ lifecycles, fundamental to long-term development, are acutely sensitive to the external economic climate, with the prevailing market interest rate environment playing a disproportionate role. Interest rates are far more than just financial metrics; they are fundamental to how capital flows and is priced. Their specific level directly dictates borrowing costs, significantly impacts how companies are valued by the market, and shapes the overall economic mood. When rates are low, accessing capital is cheap and abundant, providing fertile ground and affordable debt that powers M&A deals and smooths the path for companies seeking to go public. Conversely, as rates climb, the cost of capital rises sharply. This cools down dealmaking activity and often forces businesses to fundamentally re-evaluate and change their strategic plans – a dynamic intensely felt in the current climate shaped by recent global inflation and central bank responses.

The point of this thesis is to understand how interest rate levels are considered in the strategic decision-making processes of Finnish growth firms when evaluating M&A and IPOs as avenues for expansion. Focusing on Finland, this study analyzes the motivations and barriers encountered by firms in response to different interest rate environments. It further aims to understand how companies adapt their capital allocation and expansion strategies in response to fluctuating capital costs and broader economic trends. Employing a qualitative research design, data is collected through three semi-structured interviews with key executives directly involved in strategic decision-making. The insights are analyzed using theory-directed content analysis, guided by market timing theory to illuminate how firms attempt to capitalize on prevailing market conditions.

The empirical investigation yields compelling findings. Firstly, the decision to pursue an IPO for growth firms is often fundamentally driven by the strategic need for substantial capital beyond the scope of alternative funding, aligning with the notion that firms utilize public markets when conditions permit large-scale fundraising. Secondly, while executives focused on rapid growth may view short-term interest cost optimization as secondary, the general economic situation, inherently reflected by interest rate levels, impacts the M&A landscape by influencing valuations and the difficulty of financing deals. Thirdly, the direct influence of interest rates on internal capital allocation appears less pronounced for growth-stage firms compared to strategic planning for significant future investments. Ultimately, the study reveals that while strategic objectives initiate M&A and IPO considerations, interest rate levels act as a determinant of the financial feasibility, timing, and attractiveness of these strategic growth pathways. As economic environments continue to evolve, further exploration into the nuanced, industry-specific responses and the long-term strategic implications of interest rate sensitivity offers fruitful avenues for future research.