Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strong Dollar Is Reshaping Cross-Border M&A in 2026
Transcript
- Lucas: So the trade-weighted dollar index hit 120.1 as of last Friday. That's up from about 119.4 a week earlier, and it's been climbing for most of 2026. Luna: Yeah, and the yen touched 160.3 per dollar. That's a pretty significant move. What does that actually mean for companies trying to buy each other across borders? Lucas: It means the calculus for cross-border M&A has shifted dramatically. If you're a U.S. company with a strong dollar, your purchasing power abroad is essentially getting a tailwind. And if you're a foreign company trying to buy American, you're fighting a headwind. Luna: We keep this show ad-free because we think these conversations should be accessible. If they've helped you think about your own work or investing, you can support that choice at buy me a coffee dot com slash fexingo. Nothing else to say on that — let's dig into the numbers. Lucas: Right, so let's take a concrete example. Say a mid-sized U.S. industrial firm wants to acquire a Japanese robotics company. Two years ago, when the yen was around 115 to the dollar, a 50 billion yen purchase price would have cost the U.S. buyer about 435 million dollars. Luna: At 160 yen per dollar, that same 50 billion yen deal costs roughly 312 million dollars. That's a 28 percent discount just from currency. Lucas: Exactly. And that's not even factoring in the fact that Japanese asset valuations have been relatively flat. So the U.S. buyer is getting a effectively a nearly one-third markdown on the sticker price. That's the kind of math that gets dealmakers excited. Luna: But it's not just Japan. Europe too. The euro is down to 1.15 per dollar, which is weak by historical standards. So U.S. firms looking at German manufacturing or French software companies are seeing similar discounts. Lucas: Yeah, the euro at 1.15 is about 10 percent below its five-year average. So for an American CEO sitting on a pile of dollars, the question becomes: why not go shopping abroad right now? Luna: And the data suggests they are. Cross-border M&A outbound from the U.S. in the first half of 2026 is running about 15 to 20 percent above the same period last year, according to Dealogic estimates. Lucas: But here's the flip side. Inbound M&A — foreign companies buying U.S. assets — is down. And that's partly because their currencies buy less. But there's another factor: borrowing costs. Luna: Yeah, a lot of emerging market firms borrowed in dollars when rates were low. Now they're servicing that debt with weaker local currencies. That eats into cash flow and makes them less able to pursue acquisitions. Lucas: Exactly. Take a Brazilian company that took out a dollar-denominated loan in 2021. Back then, the Brazilian real was around 5.2 to the dollar. Now it's closer to 6.4. So their debt service costs have gone up by about 23 percent in real terms. That's capital that can't go toward M&A. Luna: So the strong dollar is a kind of M&A sorting mechanism. It rewards U.S. buyers and punishes foreign buyers, especially from emerging markets. Lucas: Right, and it's not just about the price of the deal. It's also about repatriating earnings. When a U.S. company buys a foreign firm, future profits earned in yen or euros will be worth less when converted back to dollars. So the acquisition thesis has to assume either that the dollar weakens eventually or that the operational synergies are strong enough to overcome the currency drag. Luna: That's a key point. A lot of people look at the purchase price discount and think it's a no-brainer. But you have to model the whole lifecycle of the investment. Lucas: Yeah, and that's where things get interesting. Some analysts argue that the dollar is overvalued and due for a correction. If that happens, the currency tailwind becomes a headwind. The same deal that looked cheap today could turn sour if the dollar weakens 15 percent over the next five years. Luna: So what's the smart play? Are companies hedging their currency exposure on these deals? Lucas: Many are. Large U.S. acquirers are increasingly using forward contracts or options to lock in the current exchange rate for the purchase consideration. But hedging the ongoing earnings translation is trickier and more expensive. So some firms are structuring deals with earn-outs or contingent payments tied to the currency. Luna: That's clever. You can structure it so that if the yen strengthens, the Japanese sellers get a bit more. It aligns incentives. Lucas: Exactly. And then there's the question of financing. U.S. companies are issuing dollar-denominated debt at relatively attractive rates — the ten-year Treasury is still around 4.2 percent — and using that cash to fund acquisitions. That's effectively borrowing cheap dollars to buy discounted foreign assets. Luna: But that adds leverage and currency risk to the balance sheet. If the dollar weakens, the value of the foreign assets rises in dollar terms, but the debt remains fixed. So it's not a pure hedge. Lucas: No, it's not. And that's why you're seeing a lot of focus on emerging market targets as well. Because the discount is steeper, but so is the risk. A U.S. firm buying a Mexican logistics company, for example, might get a 20 percent currency discount, but the peso is more volatile than the yen. Luna: So what sectors are seeing the most activity? I've noticed a lot of U.S. tech firms looking at European software companies. Lucas: Yeah, European tech valuations are relatively depressed compared to the US. The NASDAQ is at 25,170, up over 20 percent year-to-date, while European tech indices are flat. So U.S. firms see an opportunity to acquire talent and products at a discount. Luna: And the strong dollar makes those European targets even cheaper. It's a double discount. Lucas: Right. But there's also a defensive angle. Some U.S. companies are buying foreign rivals to prevent them from being acquired by Chinese firms. With the yuan at 6.77 per dollar, Chinese acquirers are also facing a headwind, but they have state-backed financing that can bypass currency issues. Luna: So the strong dollar is reshaping M&A in a way that favours American firepower but also concentrates risk. Are we seeing any pushback from foreign governments? Lucas: A bit. The European Union is tightening its foreign subsidies regulation, which affects all non eu acquirers, including U.S. firms. And Japan is becoming more protective of certain tech assets. So even with a currency advantage, U.S. buyers face regulatory hurdles. Luna: But overall, it seems like a once-in-a-decade opportunity for U.S. companies with cash. Do you think they're being aggressive enough? Lucas: Some are. The biggest U.S. private equity firms are raising record-dollar funds specifically for international deals. But corporate boards are cautious. They remember the 2010s, when the dollar weakened and a lot of cross-border deals underperformed. Luna: So it's a time to be bold but smart. Currency can swing both ways. Lucas: Exactly. And that's the conversation happening in boardrooms right now. The strong dollar gives you an edge, but only if you manage the risk that it won't last forever.