Terrific question. It can have an effect on company valuations. Inflation is computed from a broad basket of categories. The impact on the value of a business depends on if the business is impacting or impacted by the inflationary pressures. Example: One of many drivers for today’s inflation is the low supply and high demand of microprocessor chips. A business in early stage talks of merging with a competitor in the computer manufacturing sector or auto manufacturing sector, both of which rely heavily on these chips as an input to the manufacturing process, may find their companies value skewed higher or lower depending on their inventory, contracts, or other factors that impact their ability to obtain consistent flows of microprocessor chips. As a result, one could argue that today’s high inflation is having an impact on such an M&A transaction. Conversely, I am in a Management Consulting Firm. Turnover is low and headcount is very stable. There are no significant economic drivers of current inflation that are having a measurable impact on our business. If we were in talks of merging with another Management Consulting Firm, there would be little to no impact of today’s inflation on valuations for that transaction. Therefore, one could argue that inflation, as high as it is, would be having no impact on such an M&A transaction.
In short, it just depends on how inflationary pressures impact the valuation of the target company and whether that valuation fits within the budget and transaction thesis such that it still makes economic sense. In the current inflationary situation, among the highest we have seen in several decades, we are still seeing a relatively high number of M&A transactions according to a variety of news reports from the WSJ to industry insider reports. Though I am no economist, it would be reasonable to assert that a driver of these transactions, despite inflation’s impact on target company valuations, is in part the assumption that inflation drivers are short lived, that inflation is largely due to the unique and short term impacts of the COVID-19 outbreak globally and it’s impact on the supply chain. Once these two core issues begin to resolve, inflationary pressures are expected to significantly decrease to more normalized levels in the Fed target range of 2%. At least SOME of the current M&A transactions are likely producing forward looking guidance around normalized inflation’s impact in the 1 – 3 year window post transaction, a time line that should reasonably see stabilization of the pandemic and supply chain concerns.