Failure to Leverage Currency Data is the Most Overlooked Opportunity in M&A Today

  • Wolfgang Koester , CEO and co-founder at FiREapps

  • 15.06.2017 11:30 am
  • M&A

Last year global merger and acquisition (M&A) activity reached record highs, accounting for nearly $4 trillion in announced volumes. Cross-border M&As made up a significant chunk of this activity, 36 percent – up from 31 percent in 2015.

But, despite the high volumes of M&As, most continue to lack an essential ingredient to maximize profits: currency analytics.

Why should currency data be factored into M&As? Using accurate and timely currency data enhances the value of the investment, reduces risk and can even make the acquisition more affordable.

Yet, many C-level executives continue to overlook this component.

Cross-border M&As are popular for a multitude of reasons, but their basic appeal usually comes down to simple economics: When the value of one currency is perceived to be high, and another is perceived to be low, corporations are incentivized to find investment opportunities in markets with lower currency values. It is no different than a friend of mine who recently took his family skiing in Canada rather than Aspen. The weak Canadian currency meant his vacation would be 30 percent cheaper in Canada than Colorado.

This is an economic principle that everyone from ski bums to CEOs can appreciate.

Perceptions Shape the Value of Investments – and Currencies

So, why do some corporates fail to fully exploit currency data in M&As? To answer this, let’s start by considering the inherent trends in global currencies and how they create opportunities.

We do not need to look back very far to do this.

Prior to the 2008 global financial crisis, the euro was strong and many European investors (in particular, Dutch pension plans) used their euro buying power to purchase U.S. assets. This shifted investor perception. Migration to U.S. investments suddenly appeared attractive, causing the U.S. dollar to increase while the perceived value of the euro slipped (further strengthening the dollar).

More recently, a similar scenario played out when Chinese investors began buying U.S. and European assets. The Chinese yuan was perceived to be strong and Chinese investors sought out overseas investments. (Although in more than a few cases, Chinese investors were willing to “overpay” for these investments because of the intellectual property included in purchase price.) Once again, this migration caused the values of U.S. and European investments to rise while the yuan declined.

I deliberately emphasize “perceptions” in these examples because both illustrate the volatility of markets and how quickly currencies – and perceptions – can fluctuate.

As you can see, currency – or foreign exchange (FX) – rates can drive investments. But the perceived value of investments can also drive FX rates.

How FX Analytics Can Enhance M&A

Traditionally, cross-border M&As included investment bankers to serve, in part, as advisors, helping boards understand how the gap between the interest rate of Currency A and Currency B might affect the merger. This gap is known as the interest rate differential. And although investment bankers understand this, he or she probably does not understand and/or lacks visibility into how currencies flow through either the acquiring company or the one being acquired.

To be fair, currency flow is a complicated. It requires a lot of historic, not-easily-found data.

This is where currency data analytics come in.

In cross-border M&As, differing interest rates can create interest-earning opportunities for the acquiring company. If the acquiring company purchases an inflationary investment, the acquiring company may still earn interest if it hedges its investment. In other words, acquiring organizations generate income while hedging their investment. They eliminate risk while earning revenue.

I referred to this as a missed opportunity at the outset of this article because not all C-level executives fully exploit the advantages that come from merging two (or more) data sets to make the M&A pricing process more precise, possibly more lucrative – but certainly less risky.

A generation ago the ability to analyze and leverage currency data to this degree was unimaginable. It would have required teams of consultants to figure it out, and by the time opportunities, costs and risks were identified, the transaction likely would have occurred (and, as such, the role currency can play would continue to be ignored - except for a possible price premium for the unknown).

Technology – and more specifically, data analytics – have created this opportunity, but it is an opportunity that only some corporations are leveraging.

Why You Should Leverage Data in M&As

Earlier this year, Financial IT featured an article by Andrew Joss, with EMEA, discussed the important role data can play in the M&A process. Joss wrote: “[Merging] companies must be able to use their shared data as quickly as possible to drive financial value.”

I agree: following a merger, quickly combining datasets does increase overall value. But I would argue that executives should be maximizing the value by fully leveraging relevant data before the M&A is finalized.

If you are a CEO, CFO or CIO considering a merger or acquisition, do not settle for an investment banker’s recommendation to offset risk using a simple premium. This approach may have made sense in 1987, but in 2017 – when advanced currency data analytics are available – it is out of step. Deutsche Bank and Wells Fargo, for instance, are two institutions that come to mind that that have woven modern currency analytics in their processes.

By leveraging currency analytics, executives considering a merger or acquisition are empowered. They can see how currencies flow through both companies – and what the eventual merger will mean for both entities. Doing so will create a competitive advantage over those multinationals considering the same acquisition.

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