U.S. companies will increasingly turn to mergers and acquisitions (M&A) to fuel their own growth as slow economic growth becomes entrenched as the new normal, New York-based Moody’s Investors Service Inc. says in a new report.
M&A represents an “obvious alternative” for companies looking to grow in an environment of overall weak economic growth, the report indicates, and low interest rates also provide inexpensive financing for deals.
“The corporate imperative to grow remains intact, with the still-slow U.S. economy continuing to push companies to seek expansion through non-organic means,” says Bill Wolfe, senior vice president at Moody’s. “We expect interest rates to rise later this year, but only modestly, thus rate hikes are unlikely to slow M&A activity for some time to come.”
Rising rates won’t have much effect on the majority of U.S. companies in 2015 and 2016, Wolfe says, since most companies have long-dated and staggered maturity dates to their debt.
While rising rates are not expected to threaten corporate credit quality in 2015 or 2016, Moody’s says that “eventually management teams will have to make choices as the cost of debt increases.”
“As U.S. interest rates go up, companies’ willingness to modify their behavior will be as important as their ability to do so,” Wolfe says.
“Higher rates will eventually force choices. If companies judge the cost of accommodating higher interest rates to be excessive and leverage and shareholder return activity don’t moderate as rates rise, more credit rating downgrades are likely after 2016.”