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America for Sale

Foreign firms are buying U.S. companies at the fastest clip in five years, creating concerns on Capitol Hill.
Tim Reason, CFO Magazine
February 1, 2006

Once again, foreigners are heeding the call to "Buy American." Acquisitions of U.S. companies by foreign firms rose 27 percent in value last year, according to FactSet MergerStat LLC, a financial-publishing firm. Government statistics that track so-called foreign direct investment also suggest this trend. In 2004, acquisitions in the U.S. financial-services industry, as well as the banking and manufacturing sectors, boosted the value of foreign purchases 31 percent to $72.5 billion, the third annual increase in a row. To be sure, that is still less than a third of the recordbreaking $322.7 billion posted in 2000, when foreigners poured money into a roaring economy. But all signs suggest that the buying spree continues.

Who are the big buyers? Not the Chinese, despite all the protectionist yammering these days in the halls of Congress. Canadians were the single biggest buyers of U.S. firms in 2004, the most recent year for which statistics are available from the U.S. Bureau of Economic Analysis (BEA). Indeed, 40 percent of the investment in U.S. companies came from Canada, surpassing Britain, historically the most active investor in the United States.

Canadians are keen on U.S. technology. Consider one of last year's bigger deals: Nortel, Canada's telecom giant, spent $448 million to buy PEC Solutions, of Fairfax, Virginia, which provides information-technology services to the U.S. Department of Defense, the Secret Service, and the Department of Homeland Security. Of course, investment flows both ways across the nation's northern border. For years, American firms have been one of the biggest sources of foreign direct investment in Canada. The BEA says U.S. firms and individuals invested $22.4 billion in Canadian companies in 2004, only a fraction less than the $22.9 billion that U.S. companies invested in Britain.

Steel and Beer
In contrast, China invested only $490 million in U.S. acquisitions in 2004 — less than 1 percent of the total, according to the BEA. Other emerging nations have been moving more quickly to invest in the States since 2002. "China was a giant in the press," observes Marc Zenner, head of the financial strategy group at Citigroup, but he points out that until recently, its investment in the United States lagged that of other emerging nations, most notably India and South Africa. India's Mittal Steel spent $4.5 billion to buy International Steel Group, in Cleveland, in late 2004. South African Breweries bought Miller Brewing Co. in 2002, and the combined company, SABMiller, snapped up half a dozen other breweries around the globe in 2005.

Still, China's $800 billion in dollar reserves gives it a fat purse with which to shop. Although the BEA hasn't yet released statistics on foreign direct investment in the United States for 2005, China no doubt will have moved up in the rankings. Two Chinese companies made multi-billion-dollar bids for trophy acquisitions in the United States — oil giant Unocal and consumer-products maker Maytag. Those bids ultimately failed, but dealmakers say the Chinese will continue aggressively bidding — and buying — in 2006. One successful bid: China's Lenovo bought IBM Corp.'s personal-computer business for $1.25 billion in 2005. That one deal accounted for more than double the total invested by China in the United States the year before.

Flocks of foreign buyers are a mixed blessing for the United States. For U.S. companies selling assets, foreign buyers likely mean bigger bids. But for U.S. companies seeking to buy assets in the States, the boom in foreign direct investment means heightened competition for assets.

Some dealmakers say Sarbanes-Oxley and other regulatory changes also put U.S. companies at a disadvantage when competing with foreign buyers. Sarbox imposes requirements that can complicate due diligence and the integration of an acquisition. (The law will apply to foreign firms listed on U.S. stock exchanges in 2007. A few firms are seeking to delist as a result.)

Handcuffs on U.S. Firms?
The bigger check on U.S. public companies may be that their directors are more skittish about approving deals in which substantial premiums must be paid in order to outbid foreigners. "U.S. companies are increasingly handcuffed," says Paul Deninger, vice chairman of Jefferies & Co., an investment banking firm in New York. "International companies that are not subject to Sarbanes-Oxley are more able to pay substantial premiums." Directors of U.S. companies typically demand the bankers provide competitive analyses before approving acquisitions. "Boards are highly reluctant to do anything that is not within a standard deviation of the median" premium paid for similar assets, Deninger adds.

Meanwhile, foreign firms are fretting about the rising tide of protectionist sentiment in the United States. Most of the sentiment is focused on China, particularly after CNOOC's failed $18.5 billion bid for Unocal. That created a furor not seen on Capitol Hill since Japanese firms began buying U.S. assets in the late 1980s. Many in Congress view China as a looming economic and security threat. "They can go on a shopping spree if they wish," warns Patrick A. Mulloy, a member of the United States-China Economic and Security Review Commission, which advises Congress on national-security issues that may arise out of trade with China.


Some in Congress view Chinese investment with concern because, unlike trading partners such as Canada, the state directly controls many large enterprises. "China is our only major trading partner that is not considered a real ally," says David Marchick, a partner with law firm Covington & Burling in Washington, D.C., who advised IBM on its deal with Lenovo. "The Department of Defense, the Department of Justice, and Homeland Security view China with great suspicion," he adds.

In recent months, China's growing appetite for U.S. acquisitions has led some members of Congress to seek to revamp the Committee on Foreign Investment in the United States. CFIUS was formed in 1975, in response to investments by oil-rich nations in the Middle East, to monitor foreign purchases of U.S. companies. It is composed of representatives of 12 government agencies and chaired by the Treasury Department. In 1988, CFIUS was charged with evaluating foreign acquisitions to determine whether they posed a threat to national security.

The President has the power to block acquisitions that CFIUS considers dangerous. Since 1988, though, only one acquisition has been barred. In 1990, a Chinese company was prohibited from buying an avionics-equipment maker. However, other investments, such as Hong Kong–based Hutchison Whampoa's investment in Global Crossing, have been withdrawn in the face of opposition by CFIUS.

Keeping the Door Open
CFIUS reviews typically take 30 days, but investigations can be extended for an additional 45 days, if national-security concerns arise. The Government Accountability Office recently suggested that Congress extend the review time, in general, to 75 days. Critics say that would cripple foreign investment in the United States. Marchick says: "If you lengthen the time that even noncontroversial investments take, then you are putting foreign investors at a disadvantage and potentially lowering the valuations of U.S. companies."

Commissioner Mulloy counters that the proposed changes would not be a burden for most acquirers. "If there is no issue," he says, "they can still be cleared in 30 days." He adds that regulation of foreign acquisitions is often billed as protectionism, but Americans are largely unaware of how many Asian firms are controlled by governments. CFIUS requires a more extensive review whenever that is the case. (CNOOC, for example, is 70 percent owned by the Chinese government.)

Still, the U.S. business community seems less concerned with issues of national security than with keeping the door open wide to investment. Several groups that lobby on behalf of business interests, including the Business Roundtable, the U.S. Chamber of Commerce, and the Organization for International Investment, have voiced opposition to expanding review time for CFIUS. In a recent letter to the Senate Banking Committee, the group wrote, "If the United States is viewed as becoming hostile to foreign investment, we put at risk U.S. firms that operate in foreign markets and the 5.3 million jobs held by Americans working for foreign firms in the U.S."

So far, their fears seem to be unrealized. In December, the Association for Corporate Growth and Thomson Financial, a financial-publishing firm, surveyed 1,977 dealmakers. Of those who expect to work on cross-border deals, 46 percent say they anticipate working with companies in Western Europe, 36 percent expect deals to involve China, and 31 percent foresee deals with Canada.

Tim Reason is a senior editor at CFO.

See "America For Sale"


Top 20 Acquisitions of U.S. Firms by Foreign Buyers in 2005
Announced Target Buyer/Country In $ Millions
July 25 VAX Teva Pharmaceutical Industries/Israel $6,899
November 18 GE Insurance Solutions/Employers Reinsurance (GE) Schweizerische Rückversicherung/Switzerland 6,800
July 11 IMS Health VNU/The Netherlands 6,363
September 1 Chiron Novartis/Switzerland 4,904
March 7 United Defense Industries BAE Systems/United Kingdom 3,814
August 29 PanAmSat Holding Intelsat Holdings/Bermuda 3,605
August 3 Reebok International Adidas-Salomon/Germany 3,521
May 4 Renal Care Group Fresenius Medical Care/Germany 3,256
August 8 Kerr-McGee UK oil & gas operations (Kerr-McGee) A.P. Møller Maersk/Denmark 2,950
October 24 Sovereign Bancorp Banco Santander Central Hispano/Spain 2,430
September 19 Spinnaker Exploration Norsk Hydro/Norway 2,238
August 17 Carter Holt Harvey (International Paper) Rank Group Investments/New Zealand 2,235
June 24 Tele.ring Telekom Service (Western Wireless) Deutsche Telekom/Germany 1,622
March 30 A. Friedr. Flender (Citigroup) Siemens/Germany 1,593
May 17 TransWestern Publishing (Bank of America) Yell Group/United Kingdom 1,575
July 19 A&P Canada (Great Atlantic & Pacific Tea) Metro/Canada 1,386
July 19 Moeller Holding (Advent International) Doughty Hanson/United Kingdom 1,332
June 14 Commercial Federal BNP Paribas/France 1,321
April 21 Transkaryotic Therapies Shire Pharmaceuticals Group/United Kingdom 1,296
June 7 Gables Residential Trust ING Groep/The Netherlands $1,273
Source: FactSet MergerStat LLC



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