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U.S. business enterprises acquired or established by foreign direct investors in 1987.

U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1987

OUTLAYS by foreign direct investors to acquire or establish U.S. business enterprises decreased to $30.5 billion in 1987, from a record $39.2 billion in 1986. Despite the decrease, outlays remained substantially higher than before 1986 (table 1). Dollar depreciation, continued U.S. real economic growth, corporate restructuring in the United States, availability of large dollar holdings in several developed countries with trade surpluses, and the ongoing strategy of several large foreign multinational companies to expand beyond their home markets all continued to encourage U.S. investments by foreigners.

The easing of outlays in 1987 was partly due to changes in U.S. tax law under the Tax Reform Act of 1986. The legislation caused a surge of investments in the fourth quarter of 1986, as buyers and sellers accelerated investment transactions they otherwise might have made in 1987; they did so to avoid certain tax provisions that were to become effective January 1, 1987, and that were relatively less favorable to merger and acquisition activity. (For a discussion, see the year-earlier article in the May 1987 SURVEY, pages 28-29.)

The substantially higher levels of outlays in 1986 and 1987, compared with earlier years, partly reflect an increase in the number of very large investments (table 2). Investments of $1.0 billion or more accounted for more than one-fourth of total outlays in 1986 and nearly one-third of total outlays in 1987.

The total number of investments in 1987 was 557, compared with 1,040 in 1986. However, the 1987 figure will be revised upward to include late reports; thus, the decrease from 1986 will be smaller than these preliminary data indicate. The revisions for investment outlays (the cost to investors of the ownership interests acquired or established) will probably be smaller than those for numbers of investments, because most of the late reports are expected to be for investments involving less than $10 million of outlays. For 1986, preliminary data were revised up 63 percent for the number of investments and 24 percent for outlays. Revised data for 1987 and preliminary data for 1988 will be published at this time next year.

A combination of factors continued to make U.S. businesses attractive to foreigners seeking investments in 1987. First, further dollar depreciation against several major currencies probably had a net positive effect. Dollar depreciation lowers the cost of U.S. assets, but it also lowers the foreign currency value of income from investments in the United States. Because of these offsetting effects, small fluctuations in the value of the dollar may not significantly influence direct investment. However, in the face of sharp dollar depreciation, foreign firms may tend to shift operations to the United States to maintain their U.S. market share. In this way, they may be able to avoid price increases to their U.S. consumers because their expenses, as well as their sales, would be denominated in dollars. Second, favorable economic conditions in the United States, particularly moderate inflation and continued expansion of business activity, also contributed to the high level of outlays. Third, the continuation of U.S. corporate restructuring, which began several years ago, has made more U.S. businesses available for foreign purchase. In an effort to become more efficient, many U.S. corporations have stream-lined operations by selling off unprofitable units or units unrelated to their main lines of business. Fourth, the trade surpluses of several major developed countries have provided them with substantial funds to invest in the United States. Fears of U.S. protectionist measures in the face of these surpluses may have encouraged foreigners to produce in, rather than export to, the United States. Finally, the ongoing strategy of a number of large foreign multinational companies to expand beyond their home markets and enhance their technological knowledge has led to acquisitions of U.S. businesses.

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 analysis.

Investment Transactions

As in the past, most outlays in 1987 were for the acquisition of existing U.S. businesses rather than for the establishment of new ones. Foreign investors spent $25.6 billion to acquire 306 existing U.S. businesses and $4.9 billion to establish 251 new U.S. businesses (table 3). By type of investor, $21.5 billion of total outlays were by existing foreign-owned U.S. affiliates and $9.0 billion were by the foreign direct investors themselves.

Industry

By industry of the U.S. business acquired or established, outlays in manufacturing, at $16.3 billion, were largest (table 4). Within manufacturing, outlays were largest in chemicals and food, each at $4.0 billion, and in "other manufacturing," at $5.4 billion. Outlays in chemicals have been large since 1985 and have been mostly by European investors. Following the recession years of the early 1980's, several U.S. chemical companies have sought to restructure by selling off unprofitable units or units unrelated to their main lines of business. Restructuring in the United States coincided with the shift by some European chemical companies from the production of low-profit bulk chemicals to high-profit items such as pharmaceuticals and specialty chemicals. These companies were particularly attracted to the United States because of strong demand and advanced technology in its specialty chemical market.

A large share of total outlays in chemicals was accounted for by the acquisition of a New York-based manufacturer of synthetic fibers and other chemicals by the U.S. affiliate of a large German chemical and pharmaceutical company. The acquisition was approved by the Federal Trade Commission after the Commission required a substantial divestiture of the U.S. company's polyester fiber operations in order to avoid reduced competition in that industry. In another transaction, a New York-based specialty chemical company was acquired by a Japanese chemical company, so that the latter could expand its current range of chemical products and gain access to the U.S. market.

Outlays in the food industry were mostly for acquisitions of U.S. beverage manufacturers. The wine and liquor business of a large North Carolina-based manufacturer of food, beverage, and tobacco products was acquired by a British beverage manufacturer. The acquisition made the company one of the largest wine and liquor concerns in the world and gave it a more diversified product and geographical range. The U.S. company sold the unit in order to concentrate on its food and tobacco businesses. In another transaction, a Wisconsin-based brewer was acquired by a large Australian brewer. Before agreeing to the acquisition, the U.S. company, one of Wisconsin's largest employers, sought assurance from the foreign company that operating autonomy and existing employees' jobs would be retained in order to avoid undue harm to the local economy.

Outlays in "other manufacturing," as in foods, were mostly accounted for by two large transactions. In the first, a New Jersey-based manufacturer of consumer goods and aircraft equipment was acquired by the U.S. subsidiary of a British manufacturing conglomerate. In the second, the tire unit of an Ohio-based manufacturer of aerospace and automotive parts was acquired by a German manufacturer. Recently, strong profits in the tire industry have increased the industry's attractiveness to foreigners. Higher profits have resulted from increased demand for automobile tires and from reduction in excess capacity by the U.S. companies.

Outlays were also large, at $2.0 billion, in machinery. They were mostly for the acquisition of the consumer electronics business of a large U.S. company by a large French electronics company. The business was sold in return for the foreign company's medical equipment business and cash. The transaction gave the U.S. company access to foreign medical equipment markets that complement its domestic hospital and laboratory equipment business.

Outside manufacturing, outlays were largest in "other industries," real estate, and finance. Outlays in "other industries," at $6.9 billion, were concentrated in services. A large Illinois-based temporary-employment company was acquired by a smaller British employment-service company. In another large transaction, a U.S. hotel chain was acquired by a British hotel operator that wanted a share of the profitable U.S. tourist business. The chain was sold as part of its U.S. parent company's plan to divest all of its nonairline assets. A third transaction involved the acquisition by a Bermuda company of a New York-based firm that provides business and home security services. The foreign company--a provider of diversified cleaning, food, and security services--bought the U.S. company to increase its U.S. market share in the security service industry.

Outlays in real estate, at $2.9 billion, were down from a record $5.2 billion in 1986. Outlays by Japanese investors were large in both years; in 1986, they had accounted for nearly three-quarters of the total in real estate. (See the next section of this article for more details.)

In finance, outlays were $1.2 billion. A large Japanese life insurance company acquired a minority stake in a New York-based brokerage concern. The acquisition reflects the continued globalization of the financial services industry. It will strengthen the U.S. company's capital position and its ability to expand into other financial markets. The Japanese company will benefit from the U.S. company's investment management skills.

Outlays were $0.8 billion in mining and $0.7 billion in petroleum. In mining, a colorado-based gold producer was acquired by an Australian company. In petroleum, a Texas-based refinery was acquired by a Venezuelan government-owned petroleum company.

In retail and wholesale trade, outlays were $0.7 billion and $0.3 billion, respectively. In retail trade, a retailer of television and audio products was acquired by a British retailer of similar products. In wholesale trade, a wholesaler of plumbing and heating equipment was acquired by a British wholesaler.

Country

By country of ultimate beneficial owner (UBO), European UBO's accounted for $19.5 billion, or 64 percent, of total outlays (tables 5, 6A, and 6B). Most of these outlays were accounted for by British UBO'S. In addition to the general factors mentioned earlier that contributed to overall outlays, the outlays by British UBO'S also reflected the substantial cash holdings of several of these companies. Four of the six 1987 acquisitions that exceeded $1.0 billion were British--the North Carolina-based wine and liquor manufacturer, the New Jersey-based manufacturer of consumer goods and aircraft equipment, the Illinois-based temporary-employment company, and the hotel chain (all mentioned earlier).

UBO's in Germany, France, and Switzerland also made large outlays. For each country, a single UBO accounted for most of the outlays. For Germany, the UBO was the previously mentioned German chemical and pharmaceutical company whose U.S. affiliate acquired a chemical company. For France, it was the previously mentioned French electronics company that acquired the consumer electronics business of a large U.S. company. For Switzerland, the UBO was a Swiss manufacturer of confectionary products that acquired a U.S. manufacturer of similar products.

Outside Europe, outlays by Japanese UBO'S were the largest and were concentrated in real estate and "other industries." However, the two largest single acquisitions were in chemicals and finance; they consisted of the previously mentioned New York-based specialty chemical company and the brokerage concern.

Last year, outlays for U.S. real estate by Japanese UBO's remained near the record 1986 level. Continued appreciation of the yen against the dollar, which reduced the purchase price of real estate to Japanese investors, was an important factor. Also contributing was the substantial increase in Japanese real estate prices in recent years, which widened the gap between after-tax yields on U.S. and Japanese real estate investments. (For more detail about Japanese investments in U.S. real estate, see the year-earlier article in the May 1987 SURVEY, page 31.)

More than one-half of the Japanese investors' total outlays in real estate in 1987 were for New York City office buildings. In one transaction, a Japanese development and real estate company acquired a large office building from a U.S. real estate concern and the land beneath the building from two Manhattan developers. In another transaction, several floors of two office buildings, previously owned by a large bank, were acquired by a Japanese insurer. In a third transaction, the headquarters building of a U.S. petroleum company was acquired by a U.S. real estate affiliate of a Tokyo company that has acquired several other New York properties in recent years. The U.S. company, in an effort to cut costs, moved its headquarters to Virginia.

Outlays by Japanese UBO's were also sizable in "other industries." The outlays were mostly for hotels in Hawaii and in the Southwestern United States. The Japanese have been especially interested in Hawaiian investments, partly because of Hawaii's relatively large Japanese population and relative proximity to Japan.

Outlays by Australian UBO's were mostly accounted for by the previously mentioned UBO that acquired a Wisconsin-based brewer. Outlays by Canadian UBOhs were down sharply from 1986, when a large department store and specialty chain was acquired by the U.S. affiliate of a Canadian real estate developer. In 1987, the two largest transactions were the acquisitions of a North Carolina-based denim cloth manufacturer by a Canadian manufacturer of woven products and of the architectural hardware unit of a Pittsburgh-based hardware manufacturer by a Canadian company.

Selected Operating Data

Total assets of the U.S. businesses acquired or established in 1987 were $111.2 billion, up from $71.8 billion in 1986 (tables 7A and 7B).

U.S. businesses acquired in 1987 had assets of $101.7 billion. The assets were mostly in finance and were largely accounted for by the acquisition mentioned earlier of a New York-based brokerage company by a Japanese insurer. Assets were second largest in manufacturing. Two acquisitions--the purchase of the chemical company by a German UBO and the consumer goods and aircraft equipment company by a British UBO--accounted for most of the total.

Acquired businesses had 331,373 employees. The acquired company with the largest number of employees was the previously mentioned hotel chain that was purchased by a British hotel operator. Acquired businesses owned 177,979 acres of U.S. land. The largest acreage obtained in a single transaction was by a Bermuda UBO that acquired a minority stake in a U.S. steel company.

U.S. businesses established in 1987 had assets of $9.6 billion, employed 15,083 workers, and owned 138,550 acres of U.S. land. Most of the acres were owned by businesses in mining, petroleum, and real estate.
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Author:Herr, Ellen M.
Publication:Survey of Current Business
Date:May 1, 1988
Words:2449
Previous Article:International travel and passenger fares, 1987.
Next Article:U.S. affiliates of foreign companies: operations in 1986.
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