U.S. business enterprises acquired or established by foreign direct investors in 1985.

Shea, Michael A.

U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1985

CONTINUED economic growth in the United States and other developed countries and corporate restructuring in the United States were the key factors contributing to foreign direct investors' increased outlays to acquire or establish U.S. business enterprises in 1985. Outlays by foreign investors, either directly or through their existing U.S. affiliates, were $19.5 billion, up from $15.2 billion in 1984. Outlays in both years were significantly higher than the $8.1 billion in 1983, but still below the record $23.2 billion in 1981 (table 1).

The increase in 1985 outlays (the cost to investors of the ownership interests acquired or established) occurred even though the number of investments fell, to 508 from 764 in 1984. Because the data for 1985 will be revised to include late reports, the actual decline in the number of investments may not be as sharp as these preliminary data indicate. The late reports are expected to cover primarily investments that were less than $10 million. For 1984, preliminary data were revised up 38 percent for the number of investments and 17 percent for outlays. Revised data for 1985 and preliminary data for 1986 will be published at this time next year.

The significantly higher outlays in 1984 and 1985, compared with 1983, were accounted for by a tripling in the number of investments that were $100 million or more (table 2). Nearly all of the increase in 1985 outlays was accounted for by two investments that were $1 billion or more.

Continued economic growth in the United States and other developed countries was a key contributor to increased outlays. In the United States, real GNP grew 6.5 percent in 1984 and 2.2 percent in 1985. The expansion was accompanied by lower interest rates and moderate inflation. Although higher stock prices in 1985 raised the cost of acquisitions, they, nevertheless, signaled to foreign investors the strength of the U.S. economy. These favorable economic conditions reinforced the incentive to invest in the United States relating to access to new technology; the depth and diversity of U.S. capital markets; political stability; and a large, homogeneous consumer market.

Continued economic growth in other developed countries, particularly in the United Kingdom, Switzerland, Canada, and Germany--the four countries that together accounted for 74 percet of 1985 outlays--provided foreign direct investors with the funds to invest in the United States. Real economic growth was projected to be 2.5 percent or better in each of these countries last year.

In 1985, as in 1984, corporate restructuring in the United States contributed to the increase in investments. The restructuring was partly related to the continued economic growth. Historically, merger and acquisition activity has been cyclical, with peaks occurring during periods of strong economic expansion. The latest peak, coming during the 1984-85 expansion, was also related to earlier disinflation and recession. Disinflation lowered stock prices and created attractive candidates for acquisition. It also forced U.S. corporations to reduce costs by consolidating operations and selling off less profitable lines of business. Efforts to streamline operations, were further prompted by the recession, which helped uncover lines of business that were performing marginally and were, thus, were candidates for divestiture. Foreign investors took advantage of this corporate restructuring by acquiring the divestiture candidates at favorable prices. As a result, they were able to gain a foothold in the U.S. market or increase their market share, obtain access to new technology, or improve their product mix.

The net effect of exchange rate changes on 1985 investments in unclear. The dollar, after appreciating against most major foreign currencies from the end of 1980 through 1984, declined in 1985. To the extent that investments are made in dollars, depreciation has both positive and negative effects. On the one hand, dollar depreciation lowers the foreign-currency cost of U.S. assets. On the other hand, it lowers the foreign-currency value of dollar income from such investments. Inasmuch as direct investments, particularly those involving large outlays, represent a long-term commitment to do business in the United States, they may not be significantly influenced by short-term fluctuations in the value of the dollar.

The next section of this article discusses investment transactions by industry and country; the last section presents selected data on the operations of the U.S. businesses acquired or established. Information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Investment Transactions

As in the past, most outlays in 1985 were for the acquisition of existing U.S. businesses rather than the establishment of new ones. Foreign investors spent $17.6 billion to acquire 287 existing U.S. businesses and $1.9 billion to establish 221 new U.S. businesses (table 3). By type of investor, $15.7 billion of total outlays were by existing U.S. affiliates, and $3.8 billion were by foreign direct investors themselves.

New foreign outlays were again dominated by several large transactions. The 33 investments that were $100 million or more accounted for only 7 percent of the number of investments, but for 64 percent of total outlays.

Industry

By industry of the U.S. business acquired or established, the increase in outlays was highly concentrated. Sharp increases in manufacturing and insurance more than offset declines in most other industries.

In 1985, outlays in manufacturing were $11.4 billion, 59 percent of the total (table 4). They were concentrated in food, at $3.5 billion, and chemicals, at $3.3 billion. In food, most of the outlays were accounted for by the acquisition of a California-based food company by the U.S. affiliate of a Swiss food company; this acquisition was the largest single investment in 1985. The Swiss company had acquired several profitable U.S. companies in recent years as part of a strategy to increase its earnings growth.

In chemicals, the U.S. affiliate of a British industrial holding company acquired a U.S. chemical company after a lengthy takeover battle was resolved in court. The share price of the acquired company, which also manufactures office equipment, had been depressed by losses in its office equipment division. The British holding company's strategy in this acquisition apparently was to buy a low-technology company that was unlikely to need much capital and then to divest its unprofitable units.

Several other acquisitions in chemicals reflected efforts by foreign and U.S. companies to alter their product mix. Several chemical companies have been shifting toward specialty chemicals, which are produced in relatively small quantities for use in high-technology industries, while some others have concentrated on commodity chemicals, which are produced in bulk quantities for general industrial use. The U.S. affiliate of a British chemical company acquired the specialty-chemicals business of a U.S. company and established two small specialty-chemical companies. A U.S. chemical company, which was restructuring its business to emphasize less cyclical specialty chemicals and biotechnology, sold its Georgia-based commodity-chemical business to a Finnish chemical company. The U.S. affiliate of a German commodity-chemical company acquired the ink and paint subsidiary of a U.S. company; ink and paint are both considered commodity chemicals.

Outlays were also large in machinery, at $1.5 billion, and metals, at $1.0 billion. The largest investment in machinery involved the formation of a U.S. joint venture between a Swedish auto company and a Michigan-based machinery company to produce construction equipment.

The two largest acquisitions in metals resulted from diversified U.S. companies selling unprofitable lines of business. The U.S. affiliate of an Australian metals company acquired the aluminum business of a U.S. aero-space company. The U.S. affiliate of a Canadian metals company acquired the aluminum business of a U.S. petroleum company.

After manufacturing, the next largest outlays, by major industry, were in petroleum, at $2.1 billion. The U.S. affiliate of a Canadian mining company acquired a petroleum extraction company that had received several takeover offers, apparently because of its good management and undervalued stock. Two foreign investors in oil-producing countries, reacting to lower prices of crude oil, acquired U.S. refining companies to ensure customers for their product. The U.S. affiliate of a Saudi Arabian investor acquired a Texas petroleum extraction company, and the U.S. affiliate of a Kuwaiti petroleum company acquired two companies, one in extraction and the other in oil services. Finally, a U.S. petroleum company sold its refining and marketing operations to the U.S. affiliate of a British petroleum company; the U.S. company had been required to sell some of its operations to satisfy antitrust laws, after its acquisition of a large U.S. petroleum company.

Outlays in "other industries" were $2.0 billion, of which $1.2 billion were in services. The U.S. affiliate of an Australian publishing company made two acquitions: One was of a company engaged in publishing business travel magazines; the other was a one-half interest in a U.S. holding company that had just purchased a film production company. The holding company used the proceeds from the sale of the one-half interest in itself to reduce debt incurred in its purchase of the film production company. The U.S. affiliate of a British consumer products company, seeking to expand its consumer services business by acquiring high-growth companies with proceeds from the sale of parts of its tobacco business, purchased a New York-based health services company.

Outlays in retail trade were $1.2 billion, virtually unchanged from 1984. The same British-owned U.S. affiliate mentioned above also acquired a retailer of eyewear and other health products.

In insurance, outlays were $0.9 billion, up from $0.2 billion in 1984. A U.S. holding company exchanged its U.S. insurance-brokerage subsidiary for a minority position in a British insurance-brokerage company. The acquisition of the U.S. insurance company enabled the British company to strengthen its worldwide operations.

Outlays in real estate were $1.2 billion, down from $2.2 billion. This figure should be used with caution, because both the number of investments and the level of outlays in real estate are usually subject to larger revisions than those in other industries. The preliminary estimate for 1985 is $1.1 billion lower than the revised estimate for 1984, but only $0.4 billion lower than the preliminary estimate for that year.

Country

Outlays classified by country of ultimate beneficial owner (UBO) are shown in table 5.sup.2 British UBO's accounted for $6.1 billion, 31 percent of total outlays. About one-half of the outlays were in manufacturing (tables 6A and 6B). In addition to the British acquisitions in chemicals mentioned earlier, a California-based forest and paper products company was acquired, after a lengthy takeover battle, by the Bermuda-based affiliate of a British investor. Despite a slump in the forest products industry, the British investor was attracted by the timberland owned by the U.S. company.

Swiss UBO's accounted for $3.8 billion of total outlays. The acquisition of the food company mentioned earlier accounted for most of these outlays. In another large transaction, an Arizona printing company and a Swiss publisher formed a joint venture to acquire the printing subsidiary of a U.S. petroleum company.

Outlays accounted for by Canadian UBO's were $2.5 billion. A Canadian financial company acquired a Connecticut-based consumer and industrial products company. The Canadian company was attracted by the U.S. company's sizable market share and profitability. In addition, a Canadian railroad acquired a railroad in the Midwest.

German UBO's accounted for outlays of $2.2 billion. Most of the outlays were in chemicals. Other transactions included a U.S. company's sale of its agricultural equipment and credit companies, both financially troubled, to the U.S. affiliate of a German machinery manufacturer.

Selected Operating Data

Total assets of U.S. business acquired or established in 1985 were $27.8 billion, down from $40.5 billion in 1984 (tables 7A and 7B). The decline was almost entirely accounted for by a decrease in the assets of banks. Banks acquired or established had assets of $0.9 billion in 1985, compared with $13.6 billion in 1984. Assets and liabilities for banks tend to be much larger than for companies in other industries, and changes in outlays for banks, thereof, have a disproportionate effect on changes in total assets and liabilities.

As mentioned earlier, most outlays were for the acquisition of existing U.S. businesses rather than the establishment of new ones. U.S. businesses acquired in 1985 had assets worth $24.5 billion. More than one-half of these assets were in manufacturing, mainly in chemicals, food, and paper. Single acquisitions, described earlier, accounted for most of the assets in food and paper. In chemicals, several large acquisitions, also described earlier, accounted for most of the assets. Acquired businesses employed 236,000 workers, of which more than one-half were in manufacturing and about one-seventh each in services and retail trade. In manufacturing, three acquisitions--one each in chemicals, food, and paper--together accounted for nearly one-half of the employment. Acquired businesses owned 2.2 million acres of U.S. land, of which 1.7 million were owned by the previously mentioned paper company acquired by the Bermudan affiliate of a British investor.

U.S. businesses established in 1985 had assets worth $3.3 billion, employed 8,000 workers, and owned 0.1 million acres of U.S. land. More than one-half of the acres owned by these U.S. businesses were in agriculture, and nearly one-third were in forestry.