Deal-making is off this year as a global recession looms, but the surging dollar offers a rare opportunity for US firms to seize overseas bargains.
The soaring US dollar has already wreaked havoc with supply chains and profit margins. Next year, it is expected to power a wave of fresh M&A around the globe as US-based corporates and private equity firms seek to leverage this growing power to acquire overseas targets. “Deal-makers are waiting on the sidelines,” says Michael Nicoletos, co-founder of investment firm AppleTree Capital, which focuses on emerging markets.
That’s especially the case in the UK: The dollar was up 20% against the British pound in the fall, company valuations are falling (the FTSE 100 is down 99 points year to date) and the Bank of England has warned that the nation risks the longest recession in 100 years.
“Everything in the UK is on sale,” Blair Jacobson, co-head of European credit at US private equity giant Ares Management, declared at a Financial Times event in mid-October. Blackstone president and COO Jonathan Gray agreed, telling MarketWatch that UK assets are “absolutely” an opportunity for investors.
Moody’s associate managing director Richard Etheridge says, “M&A is going to be driven more by financial markets than whether the dollar has strengthened; but clearly the strengthening dollar over the last few years has led to opportunities in the UK, because [they can be cheaper] than the US home market.”
The dollar also rose against the euro—15% in the early fall. That makes European companies look especially attractive. In September, Northbrook, Illinois-based Idex Corporation recently spent €700 million (about $726 million) on Gelderse Muon, a tech company in the Netherlands. Commenting on the purchase, Scott Adelson, co-president of investment bank Houlihan Lokey, told a Dutch newspaper that, going forward, more companies like Porsche will be taken private rather than added to stock exchanges, following a lackluster year for initial public offerings.
The inexorable rise of the dollar against a string of currencies (the US Dollar Index recently hit a 20-year high) is opening plenty of M&A opportunities in other corners of the globe as well. For some non-US companies, an expensive dollar is an expensive problem: Their revenue is in their local currency, but they need to pay down their debt in dollars. The Institute of International Finance says that global debt surpassed $300 trillion in 2021. Nearly 80% of world trade is conducted in dollars, according to Swift; and according to the Bank for International Settlements, 84% of all nondomestic debt globally is in dollars.
“Emerging market currencies have been crushed this year and suddenly inflation is through the roof, as much as 80%,” Nicoletos says. “The magnitude of the damage is huge.”
After the Asian financial crisis, US-based companies snapped up strategic partners or counterparts in Thailand and South Korea, for example, on the cheap. Today, Asian countries are experiencing a debt-burden déjà vu. Sri Lanka defaulted on its debt in May; and Pakistan came close to defaulting before striking a $1.17 billion deal with the International Monetary Fund, approved in August.
“There’s a point where companies need to refinance, but can’t under the rates they were used to; and that’s where distressed funds come in and pick up these names,” Nicoletos says. “I don’t think we’re there yet. I think during the second half of next year, we’re going to see things picking up.”
Deal activity is ramping up now in Japan, where the dollar soared around 27% against the yen in September, a 24-year low for the Asian currency. US-based private equity firms funneled $11.26 billion into Japan for the year as of Sept. 12. That’s a 15% increase on the $9.54 billion invested for all of 2021, according to data compiled by S&P Global Market Intelligence.
Bain Capital recently snapped up Tokyo-listed Net Marketing for ¥13.6 billion (about $97 billion), and Kohlberg Kravis Roberts & Co. got Hitachi Transport System for about $5 billion. US-backed private equity firms will “likely remain keen to search for Japanese businesses for a potential acquisition,” given the “soaring value” of the dollar against the Japanese yen and lower stock prices in Japan, S&P analysts note.
Latin America is also attractive. American companies that typically used manufacturers in China are increasingly turning closer to home. This has been promoted by factors including the pandemic, strained supply chains, the lingering US-China trade war and rising wages in China. Dearborn, Michigan–based carmaker Ford and Arlington, Virginia–based aerospace manufacturer Boeing are among those that have “nearshored” more of their operations to Latin America and the Caribbean.
Mexico, which Bank of America analysts recently named the No. 1 choice for US corporates, has seen its manufacturing industry grow 5% this year. It’s now bigger than before the pandemic, while average labor costs are now lower than in China.
“We see some cracks in globalization,” Nicoletos says. “We’re going from globalization to regionalization, which means that [businesses] will want to keep supply chains closer to home.”