European M&A will test the soaring dollar

Fred Smith, boss of FedEx of the US, said last week he would pay $4.8bn for Dutch courier TNT Express. That is 30 per cent less than the dollar amount that US rival UPS was prepared to stump up for TNT three years ago (before regulators got in the way).

But the Dutch company's shareholders have good reason to bite Mr Smith's hand off.

TNT's earnings and share price have been weak for some time. In addition, this is a better offer than the dollar valuation would suggest. In euro terms, investors will receive only 15 per cent less than they would have done from UPS, thanks to the alchemy of the exchange rate. One dollar back in early 2012 was worth only 75 euro cents; now it buys more like 93 cents.

Sure enough, Mr Smith cited the dollar's appreciation against the euro as a primary driver of the deal. The broader question is whether a 12-year high in the dollar's buying power will make 2015 a peak year for European mergers and acquisitions by US companies.

Merger and acquisition activity is clearly resurgent in general. The FedEx-TNT deal was dwarfed within hours by Royal Dutch Shell's £47bn planned takeover of the UK's BG - a transaction with little or no currency driver. And in the US, another giant pharmaceuticals acquisition was unveiled, with a bid for Perrigo by Mylan for $29bn.

Until now, the M&A boom has left Europe behind. In the first three months of the year, M&A transactions in the US were up 30 per cent to $399bn - accounting for nearly half of all dealmaking - while volumes in Europe fell 4 per cent to $168bn, according to data from Thomson Reuters.

But those numbers hide an interesting sub-theme in Europe. The value of inward bound deals from the US more than doubled over the 12 months to the end of March, hitting an eight-year high.

Separate research from Deloitte, a consultancy, suggests more than a quarter of all European deals last year were inbound acquisitions by US or Asian buyers - the highest proportion in more than a decade. The weak euro not only drew American buyers but many from China, too.

Bankers in the City of London, where many of these European takeovers are masterminded, certainly sound more upbeat than they have for years. For them, the strong dollar is just the cherry on an already appetising cake.

European targets, they argue, are fundamentally attractive because the worst of the eurozone crisis is over and a growth rebound is imminent. In addition, so their bullish pitch to potential buyers goes, cash resources are plentiful after years of steady profit accumulation and limited dealmaking. For a prospective US buyer, the M&A argument is all the more compelling because many such companies are sitting on cash piles outside the US that, for tax reasons, it makes no sense to repatriate.

The low oil price is another spur. It is already prompting the kind of defensive opportunism evident in the Shell-BG deal. More broadly it makes any company with significant exposure to oil and energy prices, such as TNT, look that much more attractive.

But there is a fine line between being bullish and being reckless. Mr Smith is perhaps best known for saving FedEx from bankruptcy years ago by betting the company's last few thousand dollars on a game of Las Vegas blackjack. If the TNT deal is really rooted in a currency punt, that should worry investors.

There are, after all, plenty of uncertainties hanging over Europe, undermining prospects for good M&A. The threat of Grexit and broader eurozone chaos, though mitigated, is firmly back on the agenda. A lot of European companies look expensive, too. Stock markets in Europe are not as inflated as those in more obviously thriving parts of the world, but they have still hit record highs in recent months.

Electoral uncertainties in seven European countries this year, most significantly the UK and Spain, should be an additional deterrent, particularly for potential buyers in highly regulated sectors such as utilities and media. To see off all the dangers hanging over European M&A, the power of the dollar will need to be truly Herculean.

The writer is the FT's financial editor

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