How Uncertainty Can Chill M&A

What does economic uncertainty mean for business owners? And specifically, what does uncertainty mean for those owners that are contemplating a sale of their business?

The Deadly “Wait and See” Approach

Several studies have shown that economic and political uncertainty, although difficult to measure, creates a slowdown in business investments. Investments, large purchases, or capital expenditures are difficult to reverse once made. The nature of these investments makes it difficult for businesses to adjust capital spend with demand, and therefore, the answer for most businesses is simply to wait until the future outlook becomes clearer.

This outcome has been studied, and we see that during periods of uncertainty, businesses do not invest in equipment and labor and actually become less productive. Bloom, in his 2009 paper studied this effect and found, “hiring and investment rates fall dramatically in the 4 months after the shock because higher uncertainty increases the real-option value to waiting, so firms scale back their plans.” 

The Impact on Mergers and Acquisitions

Even if you eliminate the “who pays for what tariffs and when” arguments, the latest round of tariffs and political polices have, and will continue to have, an impact on mergers and acquisitions. Outside of the actual costs of tariffs, there is the cost of uncertainty, which has a chilling effect on business decisions in general.

This economic uncertainty has a dampening impact on domestic mergers and acquisitions, which were just beginning to pick up after an 18-month slowdown. The initial increase we saw, driven by reduced interest rates and exuberance around this administration’s fiscal oversight, has been tarnished by the inability to predict future business performance. 

In fact, this January saw the lowest deal volume experienced in a decade according to Ion Analytics. Compared to January 2024, the overall number of U.S. mergers and acquisitions collapsed nearly 30 percent in January 2025, to 873 deals, the lowest level since 2015. Globally, total transactions fell 18 percent compared with a year ago. Markets and businesses thrive best in environments they can predict, and the latest policies are less about the actual tariffs and more about the uncertainty they create.

In the short term, unpredictable trade policies and disruptions (actual or potential) to supply chains will cause businesses to sit on their hands until they can figure out what future operating expense margins will look like. Acquisitions will likely take a back seat until targets and buyers can somewhat confidently project the next 12- to 24-months. 

Businesses will adapt in the long run, of course, but changes in the supply chain require time and may result in increased costs and/or margin erosion in the short term. Anecdotally, we are also seeing businesses begin to stockpile inventory. Many small businesses learned during the COVID shortages that there are items for which there isn’t a domestically produced alternative. To combat that this time around, they are proactively increasing inventory purchases ahead of any proposed tariffs. 

It’s Not Just Tariffs

We are also hearing new doubts surrounding interest rates and inflation. We know there is incredible pressure for private equity firms to sell their portfolio assets and there are unprecedented amounts of cash in the system looking to execute on transactions. However, M&A deals require a certain confidence in overall market conditions and the availability of debt. 

While the promise of lower regulation on the deal making environment was predicted to spur transaction activity, other conditions are creating massive uncertainty. Immigration, tax, energy, and political stress have added to the chilling effect of transactions. There has also been a re-emergence of inflation concerns among business owners, particularly small companies. All these factors drive additional uncertainty and leave businesses unable to confidently determine their future pricing, margins, and profitability. Without a good sense of what an income statement will look like, investors will wait for things to settle down.

Foreign Investment May Be the Only Bright Spot

One area where we may see increased acquisition activity is with foreign investors making domestic acquisitions in order to secure U.S. manufacturing. However, even these deals will require additional due diligence with lingering questions of protectionist policies that are yet to be proposed. Transactions will more closely be scrutinized for any national security risks, which will place additional burdens on companies in the technology, semiconductor, energy, defense, and even advanced manufacturing industries. 

In many ways uncertainty is a tax on businesses. Like a traditional tax, it alters decision making beyond pure economics. As businesses struggle with investment, hiring, and pricing, we will see impacts on merger and acquisition activity. Generally, businesses are pleased with an environment that reduces regulatory oversight, government intervention, energy prices, and taxes; however, all of those factors are being dampened by the uncertainty tax. Expect CEOs and deal makers to move cautiously for the next quarter or two.