Foreign currency exchange rates can have a major impact on the flow of cross-border mergers and acquisitions (M&A) deals. In a cross-border M&A, the target company and the acquiring company are in different countries. Studies show that companies in countries whose currencies have appreciated substantially are more likely to target acquisitions in countries whose currencies have not appreciated as much. Since the acquiring company has a stronger currency relative to the country of the acquisition, the transaction is more affordable on a relative basis.
Foreign currency traders may even take advantage of major international M&As for profitable trade setups. A large cross-border M&A often requires a large currency transaction. This transaction can have an impact on the relative exchange rates between the two countries for large deals.
Impact of Currency Movements
A 2010 study showed that currency movements can have a significant impact on acquisitions, especially between countries that are in the same region. The study examined over 56,000 cross-border mergers between 1990 and 2007. It found that the exchange rate for the country of the acquiring company tends to increase 1.12, 2.13 and 3.43% in the 12, 24 and 36 months before the deal versus the currency of the target company. This currency appreciation often results in the acquiring company having a greater relative value than the target company.
The study performed statistical multivariate analysis on the returns of currencies between pairs of countries. This analysis found that a two standard deviation increase in the real exchange rate for two countries is associated with a 22% increase in the expected number of acquisitions in the country with the depreciated currency for deals between the two countries. These currency movements are even more important when one country is generally wealthier than the country of the target company. The study also found that the relative value of the stock markets in each country played an important role.
Structure of Mergers and Acquisitions
"Mergers and acquisitions" is a general term used for the consolidation of companies. Mergers occur when two companies combine to form one new company. Acquisitions happen when one company buys another company.
These deals most often involve the purchase of stock, cash deals or a combination of the two. When the acquiring company is in a country that has a strong currency, it may be more likely to include cash as part of the transaction due to the higher relative value of its currency. Another factor is debt denominated in the currency of the target company is more attractive to the acquiring company because it is cheaper. The company may take on debt in the country of the target company and pay for it with the more valuable currency of the acquiring company.
Foreign Exchange Trade Opportunities
Foreign exchange traders can use announcements of larger cross-border M&A deals as trading opportunities. Although a large M&A deal in excess of $1 billion pales in comparison to the trillions of dollars in the foreign exchange markets, there can still be a significant impact on currency exchange rates.
A 2000 study found that large M&A deals can result in an increase in the domestic currency of the target of 1% relative to the currency of the acquiring company. The study further found that for every deal in excess of $1 billion, the currency of the target corporation increased in value by around 0.5%. These currency movements are most pronounced in the days after the announcement of the deals.
The structure of the M&A deal is important to gauge the extent of any impact on currency rates. The larger the cash portion of the deal, the greater the impact on the currency exchange rates between the countries. All cash deals have the greatest impact since they involve the selling of a substantial amount of the acquiring company’s currency to convert into the currency of the target company. On the other hand, an all-stock deal is less likely to have a pronounced impact. The currency impact of a hybrid deal of cash and stock depends on the percentage of cash involved in the deal.
