As they translate their European profits back into U.S. dollars, a host of American multinationals are claiming the euro's 7 percent drop in value since the beginning of the year is pulling revenues down. Among others, The Gillette Co. says first-quarter sales in Europe would have increased 9 percent (rather than dropping 4 percent) over the same period last year without the currency impact, largely because of the euro, while both McDonald's Corp. and Dupont are facing 10 percent losses on European sales revenues because of a weak euro in the first quarter.
Some market-watchers, however, argue that the euro offers benefits to U.S. firms that outweigh currency effects. Integrating 11 currencies into a single market provides a larger and more stable source of capital funds, often at lower interest rates than American capital markets do, says Sarwar Kashmeri, publisher and CEO of EbizChronicle.com, a B2B online daily. Gillette, for example, doubled its amount of euro borrowing to $2.2 billion in 1999. And, of course, some companies are mitigating losses through currency hedges. Gillette says it offset more than $60 million in currency losses in Q1 to cut the damage to about $13 million.
"All of these companies are sophisticated players. They've been managing currency translations and hedges in 11 different currencies, whereas now they're watching one currency," says Kashmeri. "It's the people who have taken bets [currency traders] who are most concerned."
Still, the euro's decline is taking its toll. For example, Computer Task Group (CTG), a $472 million Buffalo, N.Y.-based IT management and consulting provider, announced in June that it would fall below analysts' expectations for second-quarter earnings, in part because its only overseas operations are in Europe. Although European revenues increased nearly 10 percent in 1999, accounting for 17 percent of total sales, those revenue gains would have been 14.3 percent had the euro not weakened. James Boldt, CFO of CTG, says the company's strategy to offset the currency decline is to minimize equity investments abroad and to hire European natives with local-currency-denominated salaries. "In terms of the income statement, however, we are affected," he says.