International M&A Boom Fueled by Global Currency War

A binge of mergers and acquisitions (M&A) is being fueled by the global currency war, which has increased the value of emerging market currencies.

The value of worldwide M&A totaled $1.75 trillion during the first nine months of 2010, a 21% increase from comparable 2009 levels and the strongest nine month period for M&A since 2008, according to Thomson Reuters.

But mergers and acquisitions involving companies located in the emerging markets skyrocketed by 62.9% during the same period over 2009, totaling $480.7 billion. During the first three quarters of 2010, emerging markets accounted for 27.4% of worldwide M&A volume compared to 21% during the comparable period in 2009.

And companies are showing more willingness to venture across borders to find the resources they're after.

M&A activity in deals across international borders has surged during the first nine months of 2010, totaling $723 billion accounting for 41.2% of overall M&A volume, compared to 26.1% last year at this time.

Just a few of the blockbuster cross-border deals pending include:

  • Wal-Mart Stores Inc. (NYSE: WMT) is attempting a $4.1 billion takeover of Massmart Holdings. Massmart is South Africa's third-biggest retailer with 290 stores across the country. It also operates outlets in 14 other sub-Saharan countries.
  • France's Sanofi-Aventis (NYSE ADR: SNY) launched an $18.5 billion hostile bid for Massachusett-based Genzyme Corp. (Nasdaq: GENZ), offering $69 per share directly to investors, raising pressure on the U.S. biotech to start negotiations.
  • U.S. drugmaker Johnson & Johnson (NYSE: JNJ) will buy the rest it doesn't already own of Leiden, Netherlands-based vaccine manufacturer Crucell NV for $2.4 billion, the companies said today in a joint statement.
  • Australia's BHP Billiton Ltd. (NYSE ADR BHP) proposed to buy Canada's Potash Corp of Saskatchewan (NYSE: POT) for $43.4 billion in the biggest proposed cross-border acquisition and indeed, the biggest deal in the world this year.

Emerging Market Currencies Soar

Despite China's stubborn stance against letting the yuan rise against the dollar, other Asian countries have seen their currencies soar as their economies outpace developed nations and the U.S. dollar tumbles in anticipation of more monetary easing.

The Japanese currency has led the way, hitting a 15-year high against the greenback last week. The strong yen forced Japan to intervene in the currency market last month - its first intervention since 2004 - and several emerging markets have followed suit.

The Aussie dollar has risen 17.5% from its June low to the current level of 95.20 cents. The Aussie hit an intraday peak of 95.83 cents this week, which prompted a number of strategists to declare it would move beyond parity with the U.S. dollar early next year.

Such currencies as the yen, Thai baht and Indonesian rupiah have also been strengthening against the dollar, euro and sterling, which make their purchases cheaper in terms of local currency.

"There is a sort of currency war going on about who can depreciate his currency fastest. But emerging currencies are appreciating because their economies are doing better," said Jonathan Xiong, director of global asset allocation at Mellon Capital Management in San Francisco told Yahoo! Business.

Brazil fired the latest shot in what its finance minister dubbed an "international currency war," doubling a tax on foreign investors buying local bonds to 4% to curb its strong currency.

The appreciating currencies, while good for households and importers, have also delivered a windfall for Asian corporations looking to grow their businesses across international borders.

Asian-Pacific companies have made $136.7 billion in offers for companies outside their home country this year, compared with $142.7 billion in the same period of 2008 and more than double last year's pace, according to data tracker Dealogic. Cross-border mergers and acquisitions involving buyers from the region hit a record $197 billion in 2008.

Because an appreciating currency has a positive impact on the cost of foreign-denominated debt and valuations, the appetite from local businesses to carry out overseas M&A will grow according to an analysis from Macquarie Group. The analysis found the currency appreciation, combined with the relative strength of local balance sheets, had caused the "stars to align" for cross-border transactions.

"While they all have their individual reasons, what's common is that these buyers are generally leveraging off their strong home markets and appreciating domestic currencies to take advantage of available opportunities in an environment where there are few buyers from other regions," Colin Banfield, head of mergers & acquisitions for the Asia-Pacific region at Citigroup (NYSE: C) told The Australian.

Natural Resources Targeted

Many companies are targeting natural resources and materials in a large-scale effort to feed their appetite for energy, power, and foodstuffs. Materials has been the most active sector so far this year, accounting for 22% of emerging market volumes with $107.2 billion in deals for the first nine months, Thomson Reuters reported.

The largest deal driving sector activity was KazakhGold's $10.3 billion offer to acquire Polyus Zoloto. Then last month, a consortium of companies controlled by a Hong Kong infrastructure company owned by tycoon Li Ka-shing said it would buy Electricité de France's U.K. electricity-distribution networks for about $5 billion, according to Dealogic.

That came days after Thai Union Frozen said it planned to buy French canned seafood business MWBrands for $867.2 million, making it one of the world's largest canned tuna firms by sales. Also, Thai coal giant Banpu offered to buy the 80.1% of Centennial Coal it doesn't own in a deal valuing the Australian company at $2.06 billion.

India's Mahindra & Mahindra was recently chosen as the preferred bidder for South Korea's cash-strapped Ssangyong Motor, Japan's Kirin Holdings bought a stake in the maker of Tiger beer, and Singapore-listed Wilmar International's $1.5 billion bid for Sucrogen, Australia's CSR's sugar business.

Deals Move Currencies in Canada and Australia

Some of the most intriguing activity for currency analysts has involved Canada and Australia, because commodity-based firms are riding high on strong prices, especially of gold and agricultural necessities.

In large part because the countries' currencies tend to be closely correlated to gains or losses in gold and oil against the greenback, the Canadian dollar has gained 3% this year while the Australian dollar is up 7.8%.

Using Canada as an example, "there's a feel-good effect among market players that they want to be long Canadian dollars," Michael Woolfolk, senior currency strategist at BNY Corp. Mellon (NYSE: BK) told MarketWatch.

"It signals market confidence in Canada if someone else wants to buy a company there," he said.

It's not so much the effect of money being converted to complete a deal, since the amount tends to be fairly small when compared to the $4 trillion currency market.

But a deal can improve investors' attitudes towards a country.

When Sanofi-Aventis launched its hostile bid for Genzyme, the dollar index, which tracks the greenback against a basket of six currencies, rose about 0.4% on the day.

And when Wal-Mart, the world's largest retailer, offered to buy Massmart, the U.S. dollar fell 0.1% against the South African rand, a fairly small move for the emerging market currency.

An acquisition announcement is more likely to move currencies than the actual event because it's difficult to know if a buyer had to convert cash to the target's currency to complete the deal, analysts said.

It also is hard to gauge how much of a deal is done in cash, how much currency will have to be converted, how much of the currency impact is hedged, and when precisely that conversion will be done.

"The signaling impact is more important," Brown Brothers Harriman currency strategy global head Marc Chandler said.

The U.S. dollar is unlikely to be moved much by acquisition news because it is by far the most actively traded currency in the world, so no deal would be big enough to overpower all the other factors driving it, analysts said.

Nations with solid, large economies but less active currencies could experience more impact from cross-border mergers and acquisitions, Woolfolk said.

The Brazilian real and Mexico's peso might be swayed by a big enough deal, he said. The New Zealand dollar, Norwegian krone or Swedish krona could also be moved because those economies, though developed, are relatively small.

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