Uncertainty has been a theme in 2016: on the heels of Brexit, Donald Trump has been named the President-elect of the United States. As a result of Trump's surprising victory at the ballot box, financial markets and the US dollar were sent into a tailspin as this news swept the globe. Despite this drop, in little over two weeks since the US election results were determined, both the capital markets and the US dollar have rebounded and plateaued. Has the foreign exchange rate actually plateaued despite this change in government? What does this mean for the future of M&A in Canada if it has not? More specifically, if there is a large fluctuation in the exchange rate, how does this effect cross-border M&A activity between Canada and the US?
There are two schools of thought regarding a change in the exchange rate and how it affects M&A in Canada with foreign acquirers, both explored in George J. Georgopoulos' paper. The first is that it has no effect on cross-border M&A. Although the assets are cheaper for the country whose currency is now relatively stronger, the foreign asset will continue to generate revenue in the foreign, and weaker, currency. When this revenue is brought back to the country of origin, it is subject to the same lower exchange rate, which has the effect of off-setting any of the savings realized in the initial acquisition.
The second theory, which Georgopoulos has found some traction, focuses on transferrable assets. When focusing specifically on a M&A transaction concerning high R&D intensive industries, it was found that currency depreciation in the target country increases the likelihood of an acquisition by a foreign company. Georgopoulos speculates that this is because companies in this category have assets or technology that can easily be brought back to the country of origin and utilized by the acquiror in their domestic market. Transferring assets does not expose the acquirer to the exchange rate and instead, allows them to utilize this technology to be more efficient in their home country. In support of his theory, he found that greenfield investments in this same sector were not affected by a change in the exchange rate.
Although it is anyone's guess how a Trump administration will shape the future of international business or cross-border M&A in general, it appears that a drastic change in the exchange rate, in either direction, will only have a small effect on the M&A realm. For most industries, the incentives to engage in a foreign merger will be driven by other factors, none of which will have to do with the exchange rate.
The author would like to thank Robert Corbeil, Articling Student, for his assistance in preparing this legal update.
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