How do rising interest rates impact a debt-financed acquisition?

Rising interest rates directly increase the cost of borrowing. In a debt-financed acquisition, financing the purchase often involves taking on significant debt. As interest rates rise, the interest expenses on this debt become more expensive, which can lead to higher overall financing costs for the acquirer. This increase in borrowing costs can result in reduced cash flow available for the acquirer since a larger portion of cash flows must be allocated to servicing the debt.

Furthermore, if the cost of debt rises significantly, it may cause the acquirer to consider issuing additional equity to finance the deal, which can dilute existing shareholders' ownership stakes. This increased likelihood of dilution stems from the financial need to maintain liquidity and manage the higher expenses associated with increased interest rates. Therefore, the impact of rising interest rates in the context of a debt-financed acquisition primarily revolves around escalating costs and potential dilution risks.