By Tara Lachapelle
The stronger U.S. dollar may be the final nudge American acquirers needed to start bidding for foreign targets they’ve had their eyes on.
Even as the rising currency weighs on earnings at some U.S. companies that have overseas operations, it’s also offering an added bonus for those scouring abroad for deals. Just last week, Ball Corp., a U.S. maker of beverage cans, agreed to buy London-based Rexam Plc for $6.8 billion, less than it would have cost a year ago thanks to the relative strength of the dollar and U.S. stocks against their European counterparts.
With American suitors getting more bang for their buck in other parts of the world, the Rexam deal is probably just the first U.S. cross-border takeover of size this year. The greenback has already gained 21 percent against the euro in the past 12 months. That means the $1.7 trillion of cash belonging to Standard & Poor’s 500 Index members in the latest quarter equates to about 25 billion euros of additional firepower they wouldn’t have had a year ago.
While a strengthening dollar shouldn’t be the predominant reason to do a deal, it does help, said Jeff Golman, head of Mesirow Financial Holdings Inc.’s investment-banking practice.
As a buyer, “your dollar goes a heck of a lot further today than it did one, two, three, four years ago,” Golman said in a phone interview from Chicago. “It’s got to be, on balance, something that tips one more in favor of seriously considering an acquisition that’s already been on the radar screen.”
Dollar Bulls
Traders are making bullish bets on the dollar amid expectations that U.S. economic growth will outpace global peers and the Federal Reserve will raise interest rates this year. That’s as the European Central Bank keeps borrowing costs at record lows.
Last week, the Bloomberg Dollar Spot Index, which tracks the currency against a basket of peers, appreciated 0.3 percent, its biggest gain since the week ending Jan. 30.
“The simple analogy is a shopper: All of a sudden something that cost $100 now costs $90 or $95, so you could almost say it’s on sale,” said Scott Rostan, chief executive officer of Training The Street, a New York-based firm that trains junior bankers and business school students. “It’s similar for companies.”
Assessing the strategic logic behind a deal is still first and foremost, Rostan said. Once that’s determined, then the buyer can weigh whether the target’s valuation is reasonable and how much it can afford to pay, he said.
Higher Valuations
Valuations are another variable leaning in American acquirers’ favor. Many U.S.-listed companies are trading for higher profit multiples than European ones, which means a U.S. buyer can offer its shares as an attractive form of payment. That’s the case for Rexam — Ball is funding just two-thirds of the purchase price with cash and the rest with equity.
S&P 500 stocks are valued at a median of about 19 times this year’s estimated earnings. That’s a more than 10 percent premium to the median multiple for members of the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Offshore Cash
Many U.S.-based companies are also flush with cash trapped offshore, which provides a different incentive for pursuing foreign takeover candidates, according to Tyson McCabe, a senior director at Nasdaq Advisory Services, a unit of Nasdaq OMX Group Inc.
“They would probably relish the opportunity to use” that overseas cash “as opposed to taking advantage of a favorable currency environment,” McCabe said.
The largest U.S.-based companies had almost $2 trillion stockpiled offshore as of last March, according to securities filings from 307 corporations reviewed by Bloomberg News at the time.
Pfizer Inc. was one such example. The drugmaker, which generates more than half of its revenue outside the U.S., tried to acquire London-based AstraZeneca Plc last year to change its tax jurisdiction and have better access to that cash without facing repatriation charges.
Other pharmaceutical companies are looking abroad, too. Canonsburg, Pennsylvania-based Mylan Inc. was spurned by Sweden’s Meda AB last year. And Actavis Plc is said to be considering a takeover of Spain’s Almirall SA.
Macro Forces
Whether the dollar’s appreciation triggers more cross-border deals may depend on why the currency is rising, which is up for debate, said Andrew Milligan, Edinburgh-based head of global strategy at Standard Life Investments, which oversees $422 billion.
“If the Euro currency is collapsing because of uncertainty about the euro zone’s prospects, and therefore the U.S. dollar is rising, why would a company in the States be thinking of buying a competitor in Europe?” Milligan said in a phone interview. “Conversely, if the European economy is relatively stable but the U.S. dollar is rising because U.S. economic prospects are good and the Fed is thinking of raising rates, then U.S. companies may feel more confident about cross-border acquisitions, and look to acquire in Europe.”
Whatever the case may be, the market for mergers and acquisitions is still proving to be robust. As some of the biggest U.S. companies face stagnating sales and earnings, they’re continuing to accumulate cash while also having access to cheap financing. This year is already off to a good start after $2.9 trillion of deals were struck in 2014, a seven-year high.
It all comes back to the basics of why you buy a company, said David Williams, New York-based chief executive officer of Deloitte Financial Advisory Services.
“The stuff that circles around the edges is interesting and makes for good stuff to talk about, but the fundamentals are what’s important,” Williams said in a phone interview. “And I think we’re in a good fundamental market right now.”
