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Written by Tom Mannion. Copyright © 2022 BDO USA, LLP. All rights reserved.

Great thoughts from BDO on inflation and M&A valuations. Ryan & Wetmore is an independent member of the BDO Alliance.

Technology, media, and telecommunication (TMT) companies are keenly aware of rising inflation and interest rates. Their influence on valuations is an eagerly discussed topic for both companies and investors.

The new uncertainties present novel challenges to management teams who have rarely been confronted with similar market conditions. Thankfully, existing tools, initiatives, and strategies can be repurposed and be part of the toolbox for mitigating these risks.

The rising storm

Inflation has been on the rise in many countries. 39 out of 46 countries analyzed by Pew Research saw increased inflation between Q3 2020 and Q3 2021.

In the US, unadjusted inflation hovered around 8% at the end of February, according to Statista data. Similarly, UK inflation hit a 10-year UK high of 5.1% in November 2021. It continued to rise, hitting 6.1% in February.

How Interest Rates, Inflation, And Geopolitical Uncertainty Influence TMT M&A Valuations

This is far beyond the Federal Reserve’s stated 2%-mark for healthy inflation.

Central banks across the globe are reacting to increased inflation by raising interest rates. In March, the US key rates were raised by 0.25% to 0.5%. It follows similar moves by, among others, Great Britain, South Korea, New Zealand, and South Africa.

Simultaneously, supply chain risks and production prices are increasing.

It may seem like a perfect storm for TMT companies and investors, further complicating areas like earnings forecasts already affected by COVID-19, the ongoing US-China trade conflict, computer chip shortages, and more.