October 17, 2022

Market Spotlight: Strong Dollar Makes European Targets Appealing

The dollar has strengthened markedly over the last several months. According to the Federal Reserve’s US Dollar Index, which tracks the currency against six others including the euro, the greenback is up around 17% year to date.

Reflecting the troubled economic conditions in Europe, which have been enflamed by the crisis in Ukraine, the euro fell below parity with the dollar in July – breaking through a notorious psychological barrier for the foreign exchange market – for the first time since 2002. The British pound has also been put through the wringer.

For international organizations with dollar-denominated debts, this means conditions have become considerably more expensive over the course of this year. But for US consumers, a stronger dollar will lead to lower prices on imported goods. And for US organizations with an eye on overseas expansion, the exorbitant privilege afforded them by their stronger currency has put them in a rather enviable position for M&A.

Bargain hunting
Thanks to this increase in purchasing power, which seems unlikely to dissipate for as long as the Federal Reserve maintains its inflation-fighting monetary policy stance and keeps its policy rate high, cross-border M&A into Europe involving US bidders could swell.

Even in the context of broader macroeconomic disquiet and a less lively M&A market – certainly in comparison to dealmaking volumes in 2021 – now may be a favorable time for US acquirers to go bargain-hunting in Europe. Even the highest-quality targets in Europe and the UK often carry less heady valuations than their US equivalents, and the strong dollar should make these opportunities all the more appetizing.

Boosting bidding
These currency swings won’t translate into swollen cross-border deal volumes instantaneously, and there are other considerations that executives must factor into their cross-border dealmaking equations – not least the war in Ukraine and political volatility in the UK. But the forecast is rather bright.

Through the first six months of this year, 612 companies in Western Europe were targeted by US bidders, not very far behind the 658 such deals announced in H1 of 2021. The last couple of months of 2022 and the start of next year could see US bidders leave a similarly sizable dent in European deal markets.
 

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