For multinational companies, one of the risks is associated with exchange rates and overall financial situation in the countries where the firm is operating. The choice of countries and development of strategy for mitigating exchange rate risks depend on many factors: market position of the firm and its competitive advantages, expansion plans, type of products and services, international regulations, etc. The purpose of this paper is to analyze the choice of acquisition for Acme, US-based company, between JEL Industries which is headquartered in the EU, in a country where euro is used, and DBC Industries, located in a European country, which does not belong to the EU and does not use euro.
The European Union includes 27 countries, 17 of which are using euro as their currency. Total population of the whole EU is 503 million people, and the population of the eurozone is 332 million people (which is comparable with the US population of 311 million people) (Griffin & Pustay, 2009). Despite certain economic fluctuations, euro remains one of quite popular currencies. The acquisition of a company located in the eurozone will allow to reduce the risks associated with the fluctuations of exchange rates of different countries. Acme will have access to a large market comparable with that of the US, and acquiring JEL Industries will help to enter this market with reduced cost and effort, compared to acquiring DBC Industries. Cheaper costs of transactions inside the eurozone also increase the attractiveness of JEL Industries compared to DBC Industries.
Since both companies considered by Acme are located in Europe, it is highly likely that Acme will have to cooperate with companies using euro sooner or later (if Acme is planning expansion, which is very likely, as the acquisition is already being considered). Thus, if Acme chooses DBC Industries, it will eventually have to deal with euro, in addition to the another currency used by DBC Industries. On the other hand, acquiring a company which is in the eurozone will decrease the costs of accounting and transaction costs for Acme in the long-term period.
Despite many advantages of acquiring JEL Industries, there are several disadvantages associated with this choice. First of all, Acme will be subject to more intensive competition in the eurozone. It should be noted that companies are tending to unite in this market segment (Czinkota, Ronkainen & Moffett, 2008), and Acme might thus have to face several large players. However, this risk depends on the competitive position of Acme at the US and world market, and on the state of this industry in the EU. The other threat is the potential vulnerability of euro to economic recession in some member countries of the eurozone such as Greece and Italy. This threat is partly addressed by the tendency to further fiscal consolidation of the eurozone, but the risk still exists. Overall, the benefits of entering the eurozone currently outweigh the disadvantages, and thus it is recommended for Acme to choose JEL Industries.