Cross-border M&A, Exchange rates and its implications for Fire Sale Acquisitions

Abstract: There is limited research of the commonly expressed notion that foreign firms acquire assets abroad at cheap prices during periods or weak currency, often referred to as foreign direct investment (FDI) fire sales. I study this phenomenon empirically by collecting transaction data and acquisition pricings for mergers and acquisitions (M&A) in and between the Euro area, United Kingdom (UK), United States (US) and Sweden during 1999-2009. Few studies have investigated the link between a weak exchange rate and increased M&A inflow for multiple countries and for such recent data. In addition, I study the flows and acquisition prices for distressed firms that are more likely to accept a foreign bid at a discount. I find mixed evidence of any relationship between M&A inflow and the exchange rate, mainly the Euro area and the UK show evidence of increased M&A inflows when the currency is weak, while there are some signs of the opposite relationship for the US and Sweden. Overall, I find little support for any asymmetries between domestic and foreign firms due to changes in the exchange rate, as suggested by the imperfect capital market theory of Froot and Stein (1991). I suggest that the link between cross-border M&A, exchange rates and relative wealth may not be as apparent as the theory predicts. Studying my sub-sample of distressed firms, I find only weak, and far from robust, evidence of any increase of foreign acquisitions of firms with weaker bargaining positions during depreciations. Moreover, there are no indications of lower acquisition prices for these types of firms neither in normal nor depreciated periods. I conclude that firm-specific distress does not lead to any FDI fire sales and that foreign competition may well be a source of additional wealth for shareholders of firms with weaker bargaining power.