Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Merger activity is actually more likely to occur when interest rates are low, as borrowing costs are cheaper and companies can more easily finance deals. When interest rates are high, the cost of borrowing money increases, making it less attractive for companies to pursue mergers and acquisitions. Therefore, target firms may not necessarily receive an especially high premium over the pre-announcement stock price.