Europe: a continent of risks and opportunities

TORONTO—Canadian firms could cash in on investment opportunities in European markets, a new report from PricewaterhouseCoopers.

While Europe may not seem like a hot market right now, the region holds potential long-term benefits for companies looking to invest.

“Many Canadian entities have already capitalized on political and economic challenges on the Continent by pursuing acquisitions using a country or bottom-up approach,” says Kristian Knibutat, PwC’s Canadian deals leader.

Knibutat advises companies to look for buy-side opportunities in Europe while also preparing for market and political volatility.

“If the 2008 credit crisis has taught us anything, it’s that planning for the worst is also an important undertaking,” she says.

The report identifies some of those risks and opportunities based on four potential outcomes in Europe.

Outcome #1: Economic growth on the continent is long and slow.

This is the most likely by-product of the European crisis, in which case Canadian firms can expect to be impacted by decreased demand for goods and services and increased competition from surplus European capacity.

But this scenario also presents buying opportunities. Indeed, many have already seized them—the average deal value of Canadian acquisitions in Europe was $255 million last year and 38 deals worth $2.7 billion have already been announced this year.

The report notes that Canadians were cautious, with 2010 deals occurring mostly in the UK and safer European countries, such as Germany.

Outcome #2: The Canadian dollar appreciates compared to the Euro—a situation all firms should prepare for.

In this case, currency fluctuations reduce margins, hurting Canadian firms’ abilities to pursue M&A and raise capital. But at the same time, the strong dollar makes European capital investment more affordable.

Outcome #3: Euro currency weakness coincides with weakness across a number of financial markets.

Even if you don’t have a dollar invested in Europe, weakness on the continent can negatively impact the value of other, apparently unrelated investments or interfer with M&A and capital raising, the report notes.

On the flipside, coordinated market weakness can open up opportunities to pursue deals in temporarily depressed domestic markets.

The report says the best way to take advantage is to have a short list of acquisition targets and strong understanding of their long-term value.

Outcome #4: Euro zone breakup.

Although it’s an unlikely outcome, the political backdrop in Europe could deteriorate to the point of forcing a eurozone breakup, risking a similar pushback to bailouts and financial intervention in North America or elsewhere in the world.