Over the past few years, we’ve seen the loonie plummet to lows not seen in decades. Although this is sad news for Canadian investors, it makes the Canadian market attractive foreign buyers who can acquire Canadian companies at a discount based on foreign currency exchange. Arguably, this bodes well for sellers who are highly motivated to sell as there may be a heightened number of offers for the business, which could result in a higher purchase price. At a time where globalization has made cross border M&A activities commonplace, fluctuations in currency rates play a significant role.
How significant? Although M&A activity is measured in billions of dollars per month, FX market trades are measured in excess of trillions of dollars per month. But the relationship between M&A and currency rates cannot be overlooked. In fact, a global survey conducted by the Economist Intelligence Unit reveals that currency fluctuation is the top consideration by executives for cross-border M&A, exceeding financing availability and asset price volatility. A study reveals that large M&A deals have been found to correlate with a 1-5% increase in the target corporations domestic currency. At first glance, an obvious explanation might be that the large cash transaction aspect of an M&A deal might account for this trend. However, even deals that financed through stock swaps have an impact, albeit less significantly.
To make things even more interesting, another theory stands for the proposition that the actual transaction is not the sole component in the correlation trend. Because the size and nature of the deal, as well as the type of financing involved can dampen that correlation, there might be something else at play. Although there isn’t a lot of data on the subject, fluctuations in currency can still take place when a deal falls through. The theory is that the expectation of an impending cross border acquisition stimulates movements in currency.
Regardless of whether changes in currency rates spur M&A activity, or vice versa, the curious investor could definitely stand to benefit from careful consideration of this peculiar relationship.
The author would like to thank Maha Mansour, Summer Student, for her assistance in preparing this legal update.
Stay informed on M&A developments and subscribe to our blog today.
