Bank for International Settlements

Francesca Fornasari

Francis Breedon

English

Research Papers in Economics

BIS Papers No 2 267
FX impact of cross-border M&A
Francis Breedon and Francesca Fornasari, Lehman Brothers
•   Globalisation has led to a steady increase in the number of cross-border M&A activities, and
so these deals are increasingly discussed in the FX market. However, since M&A activity is
still measured in billions of dollars per month, as compared with the trillion-plus a day traded
in the FX market, it is not clear what impact these deals actually have in practice.
•   Using a large sample of past M&A deals, we find that these deals do indeed have an impact
on exchange rates, causing, on average, a 1% appreciation of the target nation currency
relative to the acquirer. We also find that such currency moves can be predicted using
publicly available data.
•   From our results, we construct an M&A currency pressure indicator that can be used to help
interpret and predict currency moves due to M&A.
Introduction
With globalisation leading to a steady increase in cross-border M&A activity, the latest deals have
become a common topic of discussion in the FX market. However, cross-border M&A flows are still
only in the billions of dollars per month, compared with FX turnover estimated at $1.5tr per day and so,
despite the interest they generate, it is not clear whether these flows are indeed significant in practice.
Number of cross-border M&A, 1982-1994
1982 1988 1994
UK–US 58 177 180
Euro-area
1–US 26 67 256
1  France, Italy, Germany. Source: Vasconcellos (1998).
This research note aims to answer three key questions:
1.  Does M&A have a significant impact on currencies?
2.  Can this impact be predicted using public information available at the time?
3.  If there is an impact, how can information on M&A activity best be summarised?
Despite the interest these deals create in the FX market, there are no previous studies to draw on to
analyse this question. Economists seem more interested in the economic motivation for M&A (see for
example Kang [1993] and Vasconcellos [1998]), rather than their impact.
Estimating the impact of M&A
Although the aim is simple, studying the impact of cross-border M&A activity on currencies is often
complicated by the intricate financing structure of such deals. We use a event study method (see, for
example, Campbell, Lo and MacKinlay [1997]) with which we test whether the returns to holding the
target nation’s currency relative to that of the acquirer where cross-border M&A deals have been
announced is significantly different from zero. By averaging over a large number of similar deals, it can
be determined if there is a consistent excess return.
The first step to estimating excess returns is to construct a sample of deals to analyse. Our sample is
based on information published in the IFR DataBase and includes all transactions that took place in
1997-99 and that are greater than US$400m. For simplicity, we concentrate on a subset of possible
country pairs: US-euro area, US-UK, US-Canada and US-Japan. The table illustrates some sample
statistics.268 BIS Papers No 2
Cross-border M&A sample
(Transactions 1997-99, >US$400m)
Avg size in US$ m Number
US-Euro area 4,076 38
US-UK 9,855 33
US-Canada 3,140 19
US-Japan 3,128 7
The graph below shows the key result from our event study. Taking an equally weighted average of all
the deals in our sample, we construct average daily excess returns, and the cumulate of those excess
returns over a period starting 10 days before an M&A deal is announced until 50 days after.
As the chart shows, our results seem to support the hypothesis that M&A does have a significant
impact. In particular, the period shortly after a deal is announced shows a strong upward movement in
the target nation’s currency (relative to the acquirer’s currency). This strengthening seems to persist,
such that, 50 days after the announcement, the target nation’s currency, on average, has appreciated
by 1% relative to the acquirers (ie, is 1% stronger than the forward rate 10 days before the
announcement would have predicted).
Returns around cross-border M&A
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
1.3
-10 0 10 20 30 40
Cumulative Average Excess Returns
Average Excess Returns
Announcement Date
The next task is to measure whether such a rise is statistically significant over the time period. For
event studies, the J-statistic is used to assess the significance of the returns:
2 / 1
2 1 





=
σ
CAR
J  ~ N(0.1)
∑ = =
N
i i eturns R ExCum
N
CAR
1
1
The J1 statistic follows a standard normal distribution. N is the total number of cross-country
transactions being analysed, while σ  is variance of the cumulated average returns. Furthermore,
ExCumReturnsi represent the cumulative average excess return at each moment in the 60-day
window. Therefore, the J1 statistic aggregates across countries, but not across time.
1
1
The results are based on simple averages of returns without taking into account the size of the deal. One reason for using
the simple average is that the J1 statistic is not appropriate for weighted-averages.BIS Papers No 2 269
Significance tests for M&A impact
Days from announcement Cumulative
returns J1 Stat Prob not 0
-10 -0.033 -0.06 0.48
0 0.025 0.05 0.52
5 0.308 0.76 0.78
10 0.671 1.28 0.90
20 0.653 1.37 0.91
30 0.862 1.81 0.97
50 1.006 2.46 0.99
The table above indicates that our result is statistically significant. With this key result, we go on to
analyse four detailed aspects of M&A:
1.  Individual country experience. Does the M&A impact on currencies differ across countries?
2.  M&A-financed through stock swaps. Do M&A deals that do not involve cash influence
currencies?
3.  M&A from a third currency perspective. Is the rise in the target currency relative to the
acquirer currency also a rise relative to a third currency, or does the acquirer’s currency fall
too?
4.  Deal Size effects. Do large deals have a larger currency impact?
Individual country experiences
The graphs below show individual country profiles. As can be seen, for the following country
couplings, US–euro area, US–UK and US–Canada, the pattern of cumulated excess returns is similar
to the average. Only in Japan’s case is the profile of returns different. Instead of showing an initial rise
followed by a levelling in cumulative returns after the announcement of an M&A deal, there is much
more volatility in returns. However, this results probably simply reflect our small sample of US-Japan
deals (only seven were recorded).
Another interpretation, however, is that M&A deals have less impact the larger the countries involved.
Certainly, our results for the euro area display lower returns than in the cases of the UK and Canada.
Unfortunately, our sample is too small to test this proposition rigorously, but it does seem intuitively
plausible.
Currency returns: US–Europe
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
-10 0 10 20 30 40
Cumulative Average
Excess Returns
Average Excess Returns
Announcement Date270 BIS Papers No 2
Currency returns: US–Canada
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
-10 01 02 03 04 0
Cumulative Average Excess Returns
Average Excess Returns
Announcement Date
Currency returns: US-UK
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
1.3
-10 0 10 20 30 40
Average Excess Returns
Cumulative Average Excess Returns
Announcement Date
Currency returns: US-Japan
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
-10 0 10 20 30 40
Cumulative Average Excess Returns
Average Excess Returns
Announcement Date
Stock swaps and M&A activity
Although the analysis so far has included M&A deals financed through stock swaps, many argue that it
is the cash element of an M&A deal (ie, the acquirer’s need to buy FX to pay for the target) that
influences the currency. What sets stock swaps apart from other ways of financing M&A activity is that
there should be no foreign exchange transaction between the countries involved in the M&A.BIS Papers No 2 271
Therefore, a priori, we expected no consistent pattern of either average or cumulative average excess
returns. However, by looking at the evidence of the seven M&A deals financed via stock swaps in our
sample, we were surprised to find that indeed cumulative positive excess returns are present
(although not statistically significant).
Currency returns: stock swaps
-0.5
0.0
0.5
1.0
1.5
2.0
-10 0 10 20 30 40
Cumulative Average
Excess Returns Average Excess Returns
Announcement Date
M&A from a third-currency perspective
While our results show how the target nation currency rises relative to the acquirer, it is not clear which
of those currencies is actually causing that excess return. Is the target currency going up or the
acquirer’s going down?
The chart below shows the acquirer’s currency relative to SDRs. It indicates negative returns of about
0.5% from announcement day to 50 days post-announcement. Comparing this result with our 1%
return on target relative to acquirer indicates that, from a third-currency perspective, an M&A deal
results in equal and opposite moves in the target and acquirer currency.
Currency returns: SDRs - acquirer nation
-0.4
-0.2
0.0
0.2
0.4
0.6
-10 0 10 20 30 40
Cumulative Average Excess Returns
Average Excess Returns
Announcement Date
Deal size effects
While the results so far indicate a significant impact of M&A deals on currencies, the event study
framework does not give an indication of how this effect changes with deal size. The two scatter plots
below show the relationship between deal size and currency impact for two distinct periods. The first
looks at the period from 10 days before announcement day to announcement day to see if there is a
significant pre-announcement day effect for larger deals. The second chart compares deal size with
currency impact for the full post-announcement period (announcement day to 50 days after).272 BIS Papers No 2
Deal size vs currency move
from t-10 to announcement day (t)
-7
-3.5
0
3.5
7
024681 0 1 2
Deal Size ($bn)
E
x
c
e
s
s
 
R
e
t
u
r
n
 
(
%
)
Deal size vs currency move
from announcement day (t) to t+50
-7
-3.5
0
3.5
7
02468 1 0 1 2
E
x
c
e
s
s
 
R
e
t
u
r
n
 
(
%
)
Deal Size ($bn)
The results of this comparison are fairly encouraging. They show little pre-announcement effect even
for big deals, but a fairly clear relationship between deal size and currency impact over the post-
announcement period. Roughly speaking, in our sample, every $1 billion has a 0.5% impact. However,
separate results for three mega-deals (>$25 billion) show that the currency impact does seem to peak
at about 5%
An indicator of the impact of M&A activity
Using our results, we have constructed a simple indicator of M&A activity that can be used to help
interpret and predict currency moves. The indicator keeps track of recent deals and gives an estimate
of currency pressure in percentage basis points that those deals put on the currency. Following our
third country results, we give a negative value to an acquirer nation and positive to a target. The table
below shows recent coefficients for this indicator.
Currency pressure coefficients for $6bn deal
Days from announcement <20 <50
Coefficients for target 0.03 0.01
Coefficients for acquirer -0.01 -0.01BIS Papers No 2 273
These coefficients represent the expected daily return of being long of the target nation currency when
a deal averaging US$5.8bn is announced. Following the results on deal size, when constructing this
indicator we give a larger weight to larger deals (though with a cutoff for “mega-deals”).
Given that our results for individual countries implied – but did not prove – that an M&A deal of a given
size has a smaller impact the larger the countries involved, we also present a GDP-weighted version
of our indicator.
M&A currency pressure indicator – 6 July 1999
(% bp per day)
Country Unweighted GDP-weighted
Australia 0.34 4.94
Canada 0.48 4.55
Chile 0.16 12.22
Czech Republic 0.10 10.47
Denmark -0.17 -5.60
Euro -1.25 -1.08
Greece -0.75 -33.02
Norway 0.41 14.60
Poland 0.07 2.72
Singapore 0.08 4.20
South Korea 0.14 1.66
Sweden 0.18 4.22
Switzerland -0.52 -9.34
United Kingdom 1.15 5.25
United States -0.41 -0.30
Conclusion
As well as confirming the widely held market belief that cross-border M&A activity does influence
exchange rates, our analysis shows:
1.  The appreciation tends to occur after the public announcement of the deal and so does not
rely on inside information.
2.  Statistical tests confirm that this excess return is statistically significant (at the 99% level)
and so is probably not just a quirk of our data.
3.  Separate tests on deals that do not involve cash (ie, stock swaps) indicate that these too
have a currency impact.
4.  From a third-currency perspective, currency moves around M&A tend to lead to a fall in the
acquirer currency and a rise in the target currency of equal size.
Using our results, we are now in a position to monitor M&A effects on currencies which are clearly an
important supplement to standard economic analysis.
References
J Campbell, A. Lo, A. MacKinlay, 1997: The Econometrics of Financial Markets, Princeton University
Press, USA.
J K Kang, 1993: “The international market for corporate control. Mergers and acquisitions of US firms
by Japanese firms” Journal of Financial Economics, 34, p345-371.
G M Vasconcellos, R J Kish, 1998: “Cross-border mergers and acquisitions: the European–US
experience,” Journal of Multinational Financial Management, 8, p431-450.

Cross-border mergers and acquisitions:

The Econometrics of Financial Markets,

The international market for corporate control. Mergers and acquisitions of US firms by Japanese firms”

Market liquidity: proceedings of a workshop held at the BIS

http://www.bis.org/publ/bppdf/bispap02n.pdf

Market liquidity: proceedings of a workshop held at the BIS

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