The dollar’s dramatic appreciation against the world’s major currencies this year has negatively impacted foreign buyers acquiring US-based business.
US inbound M&A totaled USD 222.5bn in the year to date (21 November), down 40% from USD 372.4bn in the same period in 2021. Compared with the average for the last five years (YTD 2017-YTD 2021), then cross-border dealmaking into the US is still down 17% by value in 2022.
Rising interest rates to combat persistently high inflation is one reason for the contraction. Another is that under President Joe Biden regulators are taking a harder look at cross-border investments and demanding mitigation measures. But the single biggest factor is the strengthening dollar – up as high as 18% against the Euro, 26% against the British pound, and 28% against the Japanese yen at various points this year.
“We just had a failed deal involving an Asian strategic trying to expand into the US through M&A. Due to the shift in relative currencies, the deal became 20% more expensive for them and they pulled out,” says Derek Liu, a partner at Baker McKenzie.
Bridge over troubled water
Faced with turmoil in their home currencies and markets, could international companies look at an acquisition in the US as – to use Paul Simon’s famous song – their bridge over troubled water?
“Capital seeks stability,” says Preston Parker, a partner in KPMG’s Global Deal Advisory practice. That search for stability explains why acquirors from the UK and Japan, which have seen some of the worst currency gyrations this year, continue to be among the top 5 spenders in the US, with Japan maintaining its level of deal count and the UK even upping it on last year.
The broader drop in US company valuations – the S&P 500 is down 17% and the tech-heavy Nasdaq is down 30% since January – also offsets the dollar’s steep appreciation, Parker adds.
Currently, inbound interest is focused on real estate, life sciences, consumer, financial services and manufacturing, while more tech-centered deals by European buyers are also expected, according to Parker.
The tech sector accounted for 24% of inbound M&A in YTD 2022, a larger proportion than last year, according to Dealogic. Healthcare was also popular, accounting for 14%, followed by professional services (10%), utility and energy (9%), real estate (8.6%), and finance (8%).
Canadian buyers dominate US inbound M&A. Six of this year’s top 10 inbound deals – Nielsen Holding (USD 15.3bn), First Horizon (USD 13.3bn), IAA (USD 8.5bn), CDK Global (USD 8.2bn), Westinghouse Electric (USD 7.9bn), and Advarra (USD 5bn) – involved Canadian buyers.
There also has been a shift toward smaller transactions. Last year, 70.5% of inbound dollars and 10.3% of deals signed involved USD 1bn-plus transactions. This year, such mega transactions accounted for 66.9% of spending and 8% of activity.
Enduring appeal
Dealmakers expect to see more international firms acquire ‘safe haven’ US assets, even as the strong dollar and high interest rates make the deal more expensive.
“US assets remain highly attractive,” says John Potter, US Deals Sector Leader for PwC. “While the dollar strength presents valuation support, the underlying US business resilience supports the relative valuations and perceptions of risk.”
Dealogic’s Likely to Issue (LTI) algorithm predicts the likelihood of a liquidity event for private equity-owned companies based on key criteria such as holding behavior, management history, and dealflow. US-based companies with the highest likelihood of seeing a liquidity event in the next 12 months-plus, according to the LTI algorithm, include Olympus Partners’ Vaco, Vista Equity’s LogicMonitor, and Pritzker’s Plaskolite. But there are several others. See the table below.
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