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Foreign Buyers Dominate Recent M&A Market
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A few years back, American tourists streamed across the border into Canada. The robust American dollar allowed them to shop and spend at what would have been considered bargain prices to the south. And it didn’t hurt that if you directly exported your purchases into the U.S., you could recoup a substantial portion of the federal and provincial GST (a value-added tax). With a minimum of paperwork, Inland Revenue would mail you a rebate check denominated in U.S. dollars, thank you very much. Fast-forward to the present. The flow of tourists has reversed, with Canadians swarming the towns and outlet malls of New England and other border areas for souvenirs and bargains (without paying the more hefty GST). So what’s happened in the interim? The value of the Canadian dollar has appreciated so that for the first time in nearly 30 years, it is about at par with the U.S. dollar; or, what’s the same thing, the U.S. dollar has fallen against its Canadian counterpart. From which side the grass looks greener depends on the exchange rate.
But tourists aren’t the only ones who watch the exchange rates to locate where their buck may have a bigger bang, so do businesses. Given the exchange rates between the U.S. dollar and other major foreign currencies, the stage is set for foreign buyers to scour the U.S. market for deals at bargain prices. The dollar has been riding low against many major foreign currencies for the past three years. In the past year, while the exchange rate between the U.S. dollar and British pound has stayed roughly the same, in that same period the gap has opened between the dollar and other major currencies. In particular, both the euro and the Swiss franc (is there any other kind now that France is in the euro zone?) have appreciated strongly against the dollar, while the Swiss franc has even appreciated relative to the euro.
Take July’s M&A activity in the health care industry. A total of 80 deals were announced worth a combined total of $70.7 billion. In terms of deal volume, foreign buyers accounted for 23 of those transactions, or 29% of the total. More striking by far is the dollar volume expended by foreigner buyers. Among the 12 most expensive deals, 10 of the buyers were foreign companies, and those 10 collectively accounted for $67.3 billion, or 95% of the month’s total M&A dollars. As the chart on page 3 of the August issue of The Health Care M&A Monthly shows, this figure is up sharply from the 37% share that foreign buyers captured in July 2007, and a near-total reversal of the 1% it captured in July 2006.
Naturally, these examples are suggestive, not deterministic. A weak dollar does not cause foreign buyers to scout the U.S. market for deals; a purely opportunistic deal based solely on the exchange differential might save you some euros or francs on paper, but could make no strategic or financial sense whatsoever. Unlike carefree tourists on vacation, businesses are looking for something more permanent and profitable than souvenirs. An acquisition has to make strategic sense. But once you have done your due diligence, the exchange rate differential does help you decide, all else being equal, where the cheaper of two targets lies. (It should also be noted that the same logic that attracts foreign buyers to look at U.S. markets also tends to restrict U.S. buyers to the domestic market, because the unfavorable exchange rate makes buying overseas more expensive.)
Is there any reason behind the recent ramp up in foreign M&A dollars being spent? Two factors present themselves: the first may be considered something of a carrot; the second, a stick. First, as noted by Bob Filek, a partner at PricewaterhouseCoopers, exchange rates do not overly affect M&A activity because, even though you’re getting more for your investment dollar, you’re also getting less cash flow in return. However, he sees the current dollar devaluation as unique in a 25-year window. If, as a foreign buyer, you believe that a recession is likely to be short term, you may expect cash flow to improve going forward, justifying an acquisition now. So buyers are betting, and acting, on what they feel is a fundamentally healthy economy, despite recent financial perturbations. Second, the credit crunch and associated liquidity issues in the United States appear to be lagging in Europe by about nine months to a year. They have already metastasized to one degree or another to Great Britain’s housing market, and some macroeconomic commentators believe that France, Germany and the rest of the Continent are not far behind. To maintain growth and become more competitive in terms of exports to North American and other markets, Europe’s major currencies may have to deflate a bit, which would lessen the acquisition advantage currently enjoyed by foreign buyers. If that proves so, the euro—and possibly the franc—would buy less in a year than it currently can. Thus, some Europe-based buyers, anticipating a potential contraction in exchange rates, appear to be making hay while the sun shines. In July alone, Switzerland’s Roche Holding announced three deals worth a combined $44.0 billion, France’s sanofi-aventis (NYSE: SNY) announced three worth $3.8 billion and England’s GlaxoSmithKline (NYSE: GSK) announced two worth $3.3 billion. Their acquisition activity appears to be backing up Mr. Filek’s contention that the current M&A market is presenting buyers with a unique set of opportunities, and will continue to do so as long as exchange rates prop that window open.
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