Hamilton Court FX’s Ben Timms reveals how a robust FX strategy can help turn your deal into a winner
We are all more than aware of the abyss of uncertainty currently causing turmoil in world economies. It’s no longer a question of wanting market equilibrium, but perhaps simply being grateful that we made it through another day containing our losses.
What this dynamic means in terms of international mergers and acquisitions is that they now carry an even greater risk and conversely an exponential opportunity, as increasing numbers of businesses fall by the wayside.
So what can you do to ring-fence your deal against all this chaos? One point that many might overlook is the role that foreign exchange plays in an international acquisition and how planning can ensure the markets work in your favour.
For shrewd businesses intending to buy a distressed UK entity to bolt-on or develop as part of an international enterprise, the foreign exchange rate between sterling and the currency of the home market is always going to be a key factor in the deal.
When you’re moving the large sums required for a business purchase, fluctuations in the markets can cost – or save you – tens of thousands in currency portfolio.
Is this recession a time of opportunity?
Many shrewd investors quite rightly see this period as opportune to bag a bargain by way of acquiring a loss-making business. So even with the world in recession, with the right contacts and correctly predicting the currency markets, buying a business out of administration or the assets of a company in liquidation can be a once in a lifetime chance to acquire an asset well below the going rate.
But particularly with overseas acquisitions, it’s critical to ensure that you hedge against future currency movements so that function becomes a deal maker, not breaker.
Offset damaging losses by implementing a forex strategy
Developing and following a foreign exchange strategy as part of your next international acquisition can shield you from the inevitable swings in the market and – depending on your position – save you a huge amount of money.
Foreign currencies are tumultuous markets with an elasticity rivalled by few others. In a time of such rapid currency fluctuations, entrepreneurs wishing to make a splash and expand their long-term macro interests through cross-border deals are facing a gargantuan minefield of uncertainty. So along with the lawyers, they should also have forex expertise within their M&A team.
Understanding the role of forex in an international acquisition
You may be headquartered in the UK or American, for example, and already have business interests in both economies: one business is a manufacturing enterprise, the other a logistics company.
Then you spot an opportunity to expand operations into America by buying an ailing logistics company.
You would be looking at a plan to merge this into your existing manufacturing company to reduce overheads. To do this, you would need the finances from America to buy the logistics company. And this is when the complexities begin.
Moving money at the wrong time can be an expensive mistake
If the exchange rate between the pound and the dollar fluctuated unexpectedly, you could even end up losing money through the acquisition. If transferred through traditional banks, the losses will be further compounded by transaction fees.
Let’s look at a real-world example. In 2010, the American business support solutions company CSG Systems International Inc acquired the British software company Intec Telecom Systems Homeplus in a £237 million deal.
To offset negative transaction costs, the firm revealed a mass saving from the deal thanks to the implementation of a successful hedging strategy readily employed by FX brokers.
A financial report was keen to emphasise the success of the strategy. In it, the author revealed:
“In September 2010, we entered into a pound sterling call/US dollar put (the “Currency Option”) at a strike price of 1.62 in conjunction with the Intec Acquisition to limit our exposure to adverse movements in the exchange rate between the two currencies leading up to the expected closing date.
“Upon the approval of the acquisition by Intec’s shareholders in November 2010, we sold the Currency Option, and entered into a forward contract for the delivery of approximately 240 million pounds sterling (which included estimated Intec Acquisition costs at that time) at an exchange rate of approximately 1.61 (the “Currency Forward”).
“During December 2010, as part of the payment process for the pound sterling purchase price, we closed out our position in the Currency Forward at an average rate of 1.58. ……”
Containing losses and protecting against future swings in the market is essential. Even within this short month time-frame, CSG Systems saw a change of 0.03 in the currency valuation.
Changes like this soon add up when you’re looking at large deals. With the global pandemic and further political upheaval on the horizon with Brexit, an ill-thought-out FX strategy could spell disaster to SMEs investing in overseas companies.
Specialist forex analytics can cut your currency risks
By working with a forex specialist, you can devise a strategy that factors in fluctuations. You might even stagger the movement of the money following any sudden shifts in the market, allowing the currency markets to work in your favour as opposed to fighting against a tide of inevitable losses.
But the lack of specialist knowledge and time to track the markets mean that not everyone knows about the risks – and opportunities – that forex presents in the M&A market.
Why a bespoke forex strategy works best
Implementing a strategy using a suite of hedging techniques designed to reduce costs will ensure your overseas transactions will be fulfilled quickly and within the tightest of margins – ensuring the best savings possible for your business. Hedging tools ultimately eliminate the uncertainty of a cross-border M&A deal.
Additionally, you will avoid banking charges, which could be the difference between a 2-4 per cent increase in savings. If you are transferring €100,000, this may lead to savings of €4,000 on the exchange rate alone when advised by a forex specialist.
How can a forex specialist save you so much compared to banks?
It’s because street banks are only required to set their exchange rates once – sometimes twice – a day. To ensure profitability, banks increase the spreads, allowing for intraday exchange rate volatility. However, currency traders deal with live rates.
Therefore, it’s relatively easy for companies acquiring businesses abroad to save capital on overseas transaction costs and negotiate market fluctuations in their favour.
Hamilton Court FX – the entrepreneurial approach to forex
Hamilton Court FX are a leading foreign exchange (FX) brokerage, providing guidance and advice to predominantly UK based businesses that trade internationally and therefore have an exposure to the foreign exchange market. They take a risk-based approach to managing their clients’ foreign exchange needs which includes bespoke solutions for their day-to-day currency purchases, their liquidity management, longer-term hedging and overall portfolio management
Many businesses find FX confusing but, with the right solutions, it has the potential for companies of all sizes to save money and be protected from economic and political risk overseas. Wherever companies want to trade in the world, they need to develop common-sense FX strategies and have a controlled and measured approach to foreign exchange.
That is where Hamilton Court’s expertise comes in.
The company utilises its extensive financial markets experience, deep knowledge of the challenges and solutions that corporates face and require, and excellent market access, to offer clients a compelling end-to-end solution to their requirements.
Importantly, they are innovative and agile and make expertise available outside of traditional office hours. Hamilton Court partner their clients in their business.
Hamilton Court FX was founded in 2010 and is FCA-regulated.