This year’s strong dollar was expected to lead to a surge in cross-border acquisitions by US firms. So far, it has not happened.
While US companies inked a similar number of cross-border deals in the year to date (15 November) as last year, dollar spend has plummeted, according to Dealogic.
US firms agreed to pay USD 158bn on foreign acquisitions in YTD 2022, a 63% plunge from USD 424bn in YTD 2021.
Buoyed by soaring stock market valuations and easy money, 2021 was an exceptional year for US outbound M&A, almost double the previous high of USD 228bn set in YTD 2007.
Ignore last year’s exuberance and compare YTD 2022 with the five-year average pre-pandemic, then spend is down just 11%.
Size matters
This year’s steep drop in US stock-market valuations has led to a retreat to smaller overseas transactions.
The tech sector continues to dominate US outbound M&A, but Silicon Valley firms currently prefer smaller cross-border deals that bring them a team of people or a new product, said Derek Liu, a partner at Baker McKenzie’s San Francisco office focused on the technology sector.
Many US tech firms are undertaking major layoffs and are in cash conservation mode, meaning big bets to expand market share are off the table, he said.
Half of all US outbound deal dollars have gone to Europe this year, a similar proportion to last year.
Europe’s highly-educated workforce, talented engineers, lower costs and a generally friendly geopolitical environment are attractive to US tech companies, said Liu. Even Russia’s war in Ukraine has not been a complete deterrent: Ukrainian software firms have been able to uproot to safer locales.
The UK consistently remains the No. 1 market for US acquirers, attracting 18% of all outbound deal dollars in 2022 YTD, down from a 22% share last year. Israel, Germany and China have all grabbed an increased share of US outbound spend.
Dollar’s strength is another’s weakness
Despite the strong dollar, American buyers have held back from spending big in Europe because the Old Continent has suffered from higher inflationary pressures and plunged faster into recession than the US, to say nothing of the Ukraine war and rising interest rates everywhere. But an uptick is expected given the huge amounts of dry powder held by private equity and on corporate balance sheets, said Preston Parker, a partner in the KPMG’s Global Deal Advisory practice.
“In conversations with clients we’re starting to see more interest in the UK and continental Europe, specifically in Spain, France and Switzerland,” he said. Just as cross-border M&A rebounded after the global financial crisis of 2007-9 and after COVID-19’s onset roiled markets in early 2020, Preston expects to see “massive waves of activity” once current volatility stabilizes.
Another mitigating factor is the dollar has appreciated precisely because international investors have seen it as a safe-haven asset as their own economies wobble.
“The strong dollar presents buying arbitrage opportunities,” said John Potter, US Deals Sector Leader for PWC. “But that same strength also reflects the underlying economic vulnerability of foreign markets, as well as the growth prospects of the businesses domiciled there.”
“If you have a big cash pile, now is the right time to start looking,” said Liu. “We have a lot of clients shopping around.”
Several overseas targets exist for US buyers, according to Dealogic’s Likely to Issue (LTI) algorithm, which predicts the likelihood of a liquidity event for private equity-owned companies based on key criteria such as holding behavior and dealflow. Those with the highest likelihood, according to the LTI algorithm, include the UK’s Nord Anglia Education, Germany’s IDnow, Canada’s Creation Technologies, Israel’s NSO Group Technologies, and China’s ISI Emerging Markets Group.
