Foreign exchange rates affect
international mergers in a number of ways. The relative strength or weakness of
the domestic versus foreign currency can have an impact on the effective price
paid for an acquisition, its financing, production costs of running the
acquired firm, and the value of repatriated profits to the parent. Accounting
conventions can give rise to currency translation profits and losses. Managing
exchange rate risk is an additional cost of doing business for a multinational
firm.
Example
The acquisitions by Union Pacific
Resources and the CIT Group (both U.S. companies) of Canadian firms were
facilitated by the decline in the value of the Canadian dollar in 1998 and
1999.