Good times, bad times
In the past year, we’ve seen both sides of the impact of foreign exchange on Canadian companies. Those with sizable U.S. customer bases – 50 per cent or more of total sales – are thriving as the Canadian dollar declines and the robust U.S. economy gives them an extra boost.
By contrast, businesses that need to make significant U.S. dollar purchases but sell mostly to Canadians are struggling, unless they can find ways to hedge or to pass on the foreign exchange (FX) impacts to customers.
Companies can mitigate their FX exposure in the context of a merger and acquisition (M&A) transaction. One way is to use U.S. dollar debt financing as part of the purchase. If the greenback strengthens, the acquisition target’s value will increase, but so will the value of the debt, and vice versa, if the Canadian dollar rises.
Companies can also use FX contracts, but these require considerable management expertise and attention. By locking in an exchange rate for, say, six months, a corporation can protect itself. On the downside, such contracts come at a cost, and a business could find itself on the wrong side of an FX bet.
The key to any analysis of how FX affects a target company is to remember that it needs review and focus on detail – the kind of work that should be undertaken with a trusted professional. Due diligence really is important.