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Member question: “How do you go about making international transactions for acquiring companies traded on an international market with shares in the local currency?
“If, for example, the price is $50M USD but you have to purchase shares in GBP or EUR:
- “Would you do a big one-time trade ($50M USD to the foreign currency)?
- “Would you do small trades/tranches at different periods of time to average into the rate?
- “Would you bid out the $50M trade across multiple banks?
- “Where would you hold the foreign currency? Do you have specific foreign accounts?
- “Would you deliver USD to the bank and then the bank delivers the foreign currency to the counterparty?”
Peer answer 1: “Fun one! Where it is large, we prefer to average into rates than be a taker at a particular moment. So we will average into it by buying forward in a few tranches. Where we agree on GAAP-only treatment for the buy forwards and where it is very large, we may start two months in advance.
- “On the other hand, we may just do it in the two to three days ahead of the transaction. In any case, we normally designate the hedges for tax purposes to avoid any noise there (but then you won’t be able to deduct any losses).
- “We will normally acquire the currency via the main US entity and then sell it to our in-house bank who will sell it to the entity making the transaction (and do any i/c loans/capitalizations necessary too).”
Member response: “Super helpful. Quick question: So your main US entity has foreign currency accounts where you can hold the currency before making the transaction?”
Peer 1 response: “We will transact with buy forwards so that we would not hold the currency (note, in establishing buy forwards, we would normally algo the spot and then do a swap).
- “We technically could hold the currency as we do have US-based currency accounts in support of hedging activities but that is not our preference.
- “At the time of the transaction our main US entity would settle the maturing buy forwards to acquire the currency and then immediately sell to the in-house bank which immediately sells to the entity it needs to get to.”
Peer answer 2: “Similar to [the first answer], where it is large and there is a high degree of deal certainty we would sometimes look to hedge in advance, often from the point where there is considerable certainty about the deal.
- “For smaller amounts, we would wait and then bid across multiple counterparties or execute an algo and have the proceeds delivered to the seller.”