TORONTO When the Canadian dollar climbs steeply against its U.S. counterpart, consumers often head south for a shopping spree.
But parity between the two currencies may prompt a more significant buying binge -- acquisition of U.S. assets by Canadian companies looking to grow.
"A stronger Canadian dollar relative to the U.S. dollar will make cross-border acquisitions more attractive, as will a greater availability of debt and equity financing," said Tina Kremmidas, chief economist with the Canadian Chamber of Commerce.
Canada's currency has risen about 7 percent since early February, peaking on Friday at 99.38 U.S. cents, its highest since July, 2008. Many analysts expect it to return to parity with the U.S. dollar, and stay strong through 2010 or longer.
That means a Canadian dollar goes further in the United States, whether for a consumer buying cheap electronics or a company eyeing a U.S. rival or its bargain-basement assets.
"People want to take advantage of an economy which has still not rebounded in the U.S. and are positioning themselves for when the U.S. is back on track," said Alain Auclair, the chief investment banker for UBS's UBSN.VX Canadian arm.
"Obviously, the strength of the dollar gives them an advantage in their ability to acquire companies down there."
Canada has other advantages too.
Canada's economic recovery has outpaced the U.S. one and corporate balance sheets are stronger. Debt and equity markets have been willing to finance deals, and may be even more enthusiastic about a U.S. purchase that could be financed in both U.S. and Canadian dollars.
"Canadian companies are better positioned than many of their international peers to purchase foreign assets. They weathered the financial crisis better than most, and emerged from the recession with stronger balance sheets -- relatively high levels of cash and low levels of debt," Kremmidas said.
NOT SO FAST
Auclair said several sectors could be buyers, including industrials, financial services and mining companies. But there are still risks in the United States.
"On the bank front, obviously Canadian banks are somewhat reluctant to take additional risks in the U.S., so they would have to be calculated risks if they were to expand further in the U.S.," Auclair said.
"But there is no doubt, with the U.S. being a significant market, if you buy a strategic asset which has a great fit with your business and you can achieve synergies, you're going to be winning at the end of the day. But you might have to be ready to take some volatility along the way."
One big risk is the U.S. economy itself, said Ed Giacomelli, managing director of investment bank Crosbie & Co, not to mention the fact that if the U.S. currency keeps falling, earnings a company reports after an acquisition will be worth even less once converted to Canadian dollars.
"We find when people are buying businesses, they're not focused on foreign exchange with a trader's mentality," Giacomelli said. "It comes down to: 'How buoyant is the economy that I'm buying into?' "
He said Crosbie & Co, which tracks mergers and acquisition activity in a quarterly survey, has not found much correlation between the value of the currency and the willingness of Canadian companies to do U.S. deals.
Auclair says Canadian companies will see some opportunities as the Canadian dollar climbs above its U.S. counterpart, but he sees barriers too. Agreeing a price is fraught in an economy where no one is sure if the biggest risks are still ahead.
"I think the buyers and sellers have not met on some of the potential M&A transactions which could get done, because the Canadians are looking at potential risks, and the owners are not quite ready to accept those kind of pricings and risk," Auclair said.
The soaring Canadian dollar does help Canadian companies in another way, allowing them to import at lower costs.
"Lots of the machinery and materials required might come from the U.S. and Europe, especially when you are talking sophisticated machinery. So our pricing power there is helping quite a bit as well," said Auclair. "For Canadian companies able to reinvest in their business, now is a great time."
(Reporting by Andrea Hopkins; editing by Janet Guttsman and Jeffrey Hodgson)