Does merger and acquisition (M&A) activity rise or fall during a recession? Why?

M&A activity crashes during a recession. This is because, for an M&A transaction to occur, someone has to sell. During a recession, the price owners can obtain for their equity in the business falls. Their desire is not to “sell low,” of course, so they wait on the sidelines until the price they can obtain is more attractive.

Why do business values fall during a recession? Four main reasons. First, business profits decline. When business profits decline prices fall. Second, buyers lose confidence in the future. They’re not sure when things will turn around and they don’t want to buy and then own a business during a prolonged recession. Third, the amount of equity in the hands of buyers shrinks. With less equity available fewer deals can get done. Last, debt financing becomes scarce. Yes, the price of debt typically declines during a recession but such is not sufficient to overcome the drag caused by debt scarcity and onerous terms.