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U.S. business enterprises acquired or established by foreign direct investors in 1986.

U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1986

OUTLAYS by foreign direct investors to acquire or establish U.S. business enterprises increased to a record $31.5 billion (preliminary) in 1986, up sharply from $23.1 billion in 1985 and continuing the increase that began in 1984 (table 1).1 U.S. tax reform legislation, passed by Congress on September 27, 1986 and signed by the President on October 22, 1986, contributed to the surge of fourth-quarter investments; investors stepped up outlays to take advantage of existing tax provisions before yearend. Also, corporate restructuring in the United States, continued U.S. real economic growth, fears of U.S. protectionist measures, and dollar depreciation contributed to the 1986 increase in foreign direct investments.

1. These data are from a BEA survey of new foreign direct investment in the United States that covers (1) existing U.S. business enterprises in which foreign investors acquired, directly or through their U.S. affiliates, at least a 10-percent ownership interest, and (2) new U.S. business enterprises established by foreign investors or their U.S. affiliates. Acquisitions of additional equity or voting interest in existing U.S. affiliates are not covered.

The data presented in the article are limited to acquired or established U.S. enterprises that had total assets of over $1 million or that owned at least 200 acres of U.S. land. Although partial reports, primarily for identification purposes, were required to be filed for investments not meeting these criteria, the data from them are not included in the accompanying tables. For 1986, 463 partial reports were filed; total assets of the U.S. business enterprises that filed partial reports were $75.2 million.

In addition to the data on new foreign direct investment presented here, BEA also publishes quarterly balance of payments flows and the annual direct investment position for both new and existing investments. The position estimates first appear in the June issue of the SURVEY OF CURRENT BUSINESS; more detailed estimates follow in the August issue. Estimates covering the range of operations of U.S. affiliates of foreign companies are available from BEA's annual sample survey of foreign direct investment in the United States; the latest estimates, covering 1985, appear in a related article in this issue of the SURVEY.

The substantially higher outlays in 1984-86 are marked by a sharp increase in the number of large investments. Nearly all of the 1986 increase was accounted for by a record number of investments of $1 billion or more each (table 2). The number of investments in 1986 was 659, compared to 753 in 1985. Total assets of the U.S. companies acquired or established were $52.0 billion, compared to $36.0 billion in 1985.

Because the data for 1986 will be revised to include late reports, the revised data may not show a decline from 1985 in the number of investments as large as indicated in these preliminary data or may show an increase. Revisions for investment outlays (the cost to investors of the ownership interest acquired or established) and total assets of the affiliates acquired or established, however, will not be as large because the late reports are expected to cover primarily investments that were less than $10 million. For 1985, preliminary data were revised up 48 percent for the number of investments, 18 percent for outlays, and 30 percent for total assets. Revised data for 1986 and preliminary data for 1987 will be published at this time next year.

Total 1986 outlays were boosted substantially by a surge in outlays in the fourth quarter, as shown in the accompanying tabulation:

Continued favorable economic conditions in the United States also contributed to the increase in 1986 outlays for new foreign investments. Moderate inflation, low interest rates relative to several other developed countries, growth in production, and strong consumer demand all reinforced foreigners' incentive to invest here.

As in 1984 and 1985, corporate restructuring was a key factor contributing to the increase in outlays for new foreign investments. The willingness of U.S. companies to sell operations provided many candidates for acquisition by foreign investors. The restructuring occurred for several reasons. Takeover threats by foreign as well as domestic investors led many companies to restructure in order to enhance shareholder values and thwart the potential takeover. The recession of the early 1980's and increased competition from abroad also contributed to the restructuring by inducing companies to streamline their operations. The recession helped to uncover inefficient lines of business and induced companies to reduce costs by consolidating operations and selling unprofitable units. Increased competition prompted a change in some companies' production strategy; many that previously sought to be as integrated as possible in the manufacturing process--from producing the raw materials to servicing the end product--narrowed their focus.

Several other factors may have contributed to the 1986 increase. First, the trade surpluses of several major developed countries provided those foreigners with the funds to invest in the United States. Second, fears of U.S. trade protectionism in the face of these surpluses may have encouraged foreign companies to produce in, rather than export to, the United States. Finally, dollar depreciation may have had a net positive effect on 1986 foreign investment by inducing firms to shift operations to the United States so that their expenses as well as their sales were denominated in dollars. Dollar depreciation lowers both the foreign currency cost of U.S. assets and the foreign currency value of income from investments in the United States. When the dollar first began to depreciate in 1985, some foreign businesses may have adjusted to the dollar's fall by lowering profit margins on exports to the United States, rather than raising prices, which could decrease their U.S. market share. As the dollar fell further, however, these businesses may have been induced to acquire U.S. assets and produce within the United States.

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 1986 were for the acquisition of existing U.S. businesses rather than for the establishment of new ones. Foreign investors spent $25.5 billion to acquire 338 existing U.S. businesses and $6.0 billion to establish 321 new U.S. businesses (table 3). By type of investor, $25.2 billion of total outlays were by existing foreign-owned U.S. affiliates and $6.3 billion were by foreign direct investors themselves.

As noted earlier, outlays were again dominated by large investments. The 46 investments of $100 million or more accounted for 75 percent of total outlays, but only 8 percent of the number of investments. A record number of new investments of $1 billion or more accounted for 34 percent of total outlays, but only 1 percent of the number of investments.


By industry of the U.S. business acquired or established, outlays in manufacturing, at $13.7 billion, were largest (table 4). Within manufacturing, the largest investment outlays were in chemicals, at $6.5 billion. Outlays in chemicals increased substantially in 1985 and 1986. Following the recession years of the early 1980's, a number of U.S. chemical companies have sought to restructure by selling off unprofitable units or units unrelated to their main lines of business. The restructuring coincided with the strategies of several European chemical companies to increase their market share in the United States, obtain U.S. technological expertise, and fill gaps in their global marketing system. Most of the outlays in chemicals in 1985 and 1986 were accounted for by European investors.

A large share of total outlays in chemicals was accounted for by the acquisition of a Connecticut-based manufacturer of chemical, cosmetic, and health-care products by the U.S. affiliate of a large Netherlands manufacturer of consumer products and packaged goods. The foreign company's goal in the takeover was to gain a foothold in the U.S. market and increase its world market share in the skincare products industry. It plans to sell a significant part of the acquired chemical operations.

In another transaction, the U.S. affiliate of a French industrial gas producer acquired a Houston-based industrial gas producer, making the French-owned company one of the largest U.S. companies in that industry. The Federal Trade Commission had required both companies to divest themselves of several plants and other assets before it approved the acquisition on grounds that, without the divestitures, the acquisition could unduly reduce competition in the production and sale of certain industrial gas products.

The prescription drug unit of a large U.S. chemical company was acquired by a British pharmaceutical concern to boost its direct sales in the U.S. prescription drug market. The U.S. company sold this unit and others in order to concentrate on its hospital supply business.

Outlays were also large in machinery, at $1.9 billion, and in "other manufacturing,' at $3.7 billion. The largest outlay in machinery involved the acquisition of a manufacturer of household appliances by the New York-based subsidiary of a large Swedish appliance manufacturer. The acquisition gave the Swedish company the opportunity to produce and market a full line of appliances in the U.S. market.

In "other manufacturing,' outlays mostly reflected two large acquisitions, one in paper products and the other in scientific instruments. The paperboard packaging unit of a large U.S. oil company was acquired by a holding company jointly owned by a large Netherlands paper company and a U.S. limited partnership fund. The acquisition was made in anticipation of expected growth in the paperboard industry. The U.S. oil company that sold the unit planned to use the sale proceeds to reduce the heavy debt it incurred through an earlier acquisition of another oil company. In scientific instruments, a U.S. producer of temperature controls and industrial equipment was acquired by a British company that manufactures similar products. The acquisition complements and strengthens the foreign company's operations here and abroad.

Outlays in retail trade were $5.1 billion, up from $1.2 billion in 1985. In the single largest investment in 1986, the U.S. affiliate of a Canadian real estate development concern acquired a department and specialty store chain. The U.S. company was an attractive takeover target because of its extensive network of profitable retail businesses and real estate holdings. After an initial rejection of its tender offer by the U.S. company, the Canadian company purchased shares of the U.S. company on the open market in an attempt to obtain majority ownership. Ultimately, the U.S. company agreed to a merger for a share price greater than that in the original tender offer.

In real estate, outlays were $4.0 billion, up from $1.9 billion in 1985. Outlays in 1986 were mainly accounted for by Japanese investors. Details are given in the next section of this article.

Outlays in "other industries,' at $3.5 billion, were largely in services. One-third of the outlays in services were accounted for by British acquisitions of advertising firms. The world's largest advertising agency, in terms of annual billings, was formed by the acquisition of several large U.S. advertising firms by a London-based advertising firm. The combination reflects the recent trend among advertising agencies to form international alliances in the face of increasing competition for multinational accounts. In another transaction, the parent company of a British advertising firm acquired two New York-based advertising firms, one of which will operate in New York, Los Angeles, and Atlanta and the other in Boston, Pittsburgh, and Chicago.

The largest single outlay in services was for the acquisition of a U.S. television network, which included several television stations and a film studio, acquired by a U.S. affiliate of an Australian concern. The acquisition followed several others in earlier years by the Australian company, which began in publishing but expanded to several other media.

Outlays in petroleum were $0.8 billion, down substantially from 1984 and 1985. The largest acquisition in petroleum was of a 50-percent interest in the refining unit of a U.S. petroleum company by a state-owned crude oil producer in Venezuela. The Venezuelan firm's strategy in the acquisition was to gain access to U.S. customers. The transaction gave the Venezuelan company an integrated oil company--combining Venezuelan oil reserves with U.S. refining capabilities.

In finance and insurance, outlays were $1.5 billion each and were substantially higher than in recent years. In finance, a large Japanese bank established a New York-based finance and leasing company. In insurance, a large British insurance company acquired a Michigan-based life insurance company through its U.S. subsidiary. The British firm was attracted by the U.S. firm's history of developing profitable products and its advanced computer technology.

In mining, outlays were $0.3 billion, and in wholesale trade, $0.8 billion. In both industries, outlays changed only slightly from 1985.


Outlays are classified by country of ultimate beneficial owner (UBO) in table 5.2 European UBO's accounted for $17.1 billion, or 54 percent, of total outlays. Outlays were 12 percent higher than in 1985, mainly because of sizable outlays attributable to UBO's in the Netherlands. A large share of the Netherlands outlays was accounted for by the previously mentioned acquisition of a Connecticut-based manufacturer of chemical products by the U.S. affiliate of a Netherlands manufacturer of consumer products. Several other sizable acquisitions by Netherlands UBO's may partly reflect the substantial appreciation of the guilder against the dollar in 1986.

2. Investment outlays can be classified by country of foreign parent, as well as by country of UBO. The foreign parent is the first foreign person in the ownership chain of the acquired or established U.S. business; the UBO is the person in the ownership chain, beginning with the foreign parent, that is not owned more than 50 percent by another person. The country of UBO may be the same as that of the foreign parent, a different foreign country, or the United States. The data classified by country of foreign parent are available in a set of supplementary tables (see box).

British UBO's accounted for $6.5 billion of outlays, the largest total for any single country. Almost one-half of these outlays were in manufacturing (tables 6A and 6B). The largest increase from 1985, however, occurred in services and was mostly for the acquisition of the U.S. advertising companies mentioned earlier.

Outside Europe, outlays for 1986, as well as the increase in outlays from 1985, were concentrated among UBO's in Canada, Japan, and Australia. For both Canada and Australia, a single UBO accounted for most of the outlays. For Japan, a number of UBO's had large outlays. Japanese real estate investments surged, accounting for 56 percent of the outlays by Japanese UBO's. A number of factors contributed to the surge. The sharp appreciation of the yen against the dollar lowered the purchase price to Japanese investors. The prospect of stabilized exchange rates late in 1986, as well as the U.S. tax law changes mentioned earlier, gave impetus to the large number of acquisitions made in November and December. Finally, the substantial increase in Japanese real estate prices in 1986 widened the gap between after-tax yields on U.S. and on Japanese real estate investments. The gap results from differences in the cost structures of investment in combination with differences in tax laws and land availability in the two countries. In Japan, most of the purchase price of real estate is represented by the land as opposed to the building. The opposite is true in the United States, where land is much more abundant. Because land is not depreciable for tax purposes in either country, an investment in the United States yields a larger depreciation expense than one in Japan. Also, depreciation schedules in the United States, although lengthened, are still more favorable to investors than those in Japan.

Most of the outlays in real estate by Japanese investors in 1986 were for office buildings in New York and California. A privately held real estate developer, which already held numerous U.S.-based properties, purchased four large office buildings in New York, Boston, and Los Angeles in 1986. The purchases were part of a long-term strategy to diversify. In another transaction, a jointly owned Manhattan office building was acquired by a subsidiary of a Tokyo-based real estate development concern. One of the owners, an oil company, wanted to sell its interest as part of the restructuring of its worldwide operations in response to the 1985-86 decline in crude oil prices.

Selected Operating Data

Total assets of the U.S. businesses acquired or established in 1986 were $52.0 billion, up from $36.1 billion in 1985 (tables 7A and 7B). Increases were largest in retail trade, finance, and petroleum.

U.S. businesses acquired in 1986 had assets of $41.2 billion. The assets were concentrated in petroleum, chemicals, finance, and retail trade. Single acquisitions accounted for a majority of the total assets in each industry. In chemicals and retail trade, the acquisitions were the same as those, mentioned earlier, that accounted for a majority of outlays in these industries; they were, respectively, the acquisition of a Connecticut-based chemical producer by the U.S. affiliate of a Netherlands company and the acquisition of a department and specialty store chain by the U.S. affiliate of a Canadian company.

Acquired businesses had 320,000 employees; almost one-half of the employees were in retail trade. In retail trade, the previously mentioned U.S. department store chain acquired by the U.S. affiliate of a Canadian company was the largest employer. Acquired businesses owned 1,098,345 acres of U.S. land, of which 75 percent were owned by the manufacturer of paperboard containers, also mentioned earlier, that was acquired by the U.S. affiliate of a Netherlands company.

U.S. businesses established in 1986 had assets of $10.7 billion, employed 11,047 workers, and owned 132,487 acres of land. Nearly one-half of the acres were owned by businesses in real estate; most of the remainder were owned by businesses in agriculture.

Table: 1.--Investment Outlays, Investments, and Investors, 1981-86

Table: 2.--Number of Investments by Size of Outlays, 1981-86

Table: The Tax Reform Act of 1986 was a key factor in this fourth-quarter surge. Buyers and sellers accelerated investment transactions--i.e., shifted outlays from 1987 into the fourth quarter of 1986--in order to take advantage of certain tax provisions that were changed effective January 1, 1987, by the Tax Reform Act. Under the new law, capital gains income is taxed at the same rate as ordinary income rather than at 40 percent of the ordinary income tax rate as under the previous law. As a result, sellers of assets had the incentive of earning higher after-tax profits by completing their transactions in 1986. Purchasers had the incentive to complete transactions before the end of 1986 so that acquired real assets would be subject to the more advantageous 1986 depreciation rules. The law also repealed certain rules applicable specifically to merger and acquisition activity. The most widely used of these was the "General Utilities rule,' which permitted the exchange of assets in acquisitions without any tax consequences. The new law repeals that rule and requires that taxes be paid on the appreciated value of the assets exchanged.

Table: 3.--Outlays by Type of Investment and Investor, by Industry of U.S. Business Enterprise, 1985-86

Table: 4.--Investment Outlays by Industry of U.S. Business Enterprise, 1981-86

Table: 5.--Investment Outlays by Country of Ultimate Beneficial Owners, 1981-86

Table: 6A.--Investment Outlays, Country of Ultimate Beneficial Owner by Industry of U.S. Business Enterprise, 1985

Table: 6B.--Investment Outlays, Country of Ultimate Beneficial Owner by Industry of U.S. Business Enterprise, 1986

Table: 7A.--Total Assets, Sales, Net Income, Employment, and Acres of Land Owned by U.S. Business Enterprises Acquired or Established, by Industry of U.S. Business Enterprise, 1985

Table: 7B.--Total Assets, Sales, Net Income, Employment, and Acres of Land Owned by U.S. Business Enterprises Acquired or Established, by Industry of U.S. Business Enterprise, 1986
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Author:Herr, Ellen M.
Publication:Survey of Current Business
Date:May 1, 1987
Previous Article:Pollution abatement and control expenditures, 1982-85.
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