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U.S. business enterprises acquired or established by foreign direct investors in 1990.

U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1990

Outlays by foreign direct investors to acquire or establish U.S. business enterprises decreased to $64.4 billion in 1990 from $71.2 billion in 1989. Despite the decrease, outlays remained substantially higher than they were before 1988, a record year (table 1). The share of outlays financed by foreign parents declined in 1990, which contributed to a reduction in capital inflows for foreign direct investment in the United States, but the use of funds from other sources increased.

The estimates for 1990 are preliminary and will be revised next year. The revisions will probably be smaller than in previous years because, this year, for the first time, the preliminary estimates include bias adjustments for late reports. See the box on page 31 for more detail.

As in past years, acquisitions accounted for most--nearly 90 percent--of total outlays, and large transactions dominated the results. Eleven investments of $1 billion or more accounted for 41 percent of outlays and 86 investments of $100 million or more accounted for 72 percent of outlays. (See tables 2A and 2B.)

The decline in outlays in 1990 mainly reflects changes in domestic and international economic conditions. The economic slowdown in the United States that began in 1989 became an economic downturn in the second half of 1990. Business conditions abroad were also sluggish; some of the major European countries, especially the United Kingdom, were in recession. The resulting deterioration in the earnings of both foreign companies and their U.S. affiliates reduced funds available for investment; the reduced availability of bank credit here and abroad also contributed to the shortage of investment funds. Further, economic uncertainty, which was heightened by the downturn in the United States and later reinforced by the Persian Gulf crisis, dampened business expansion plans.

Although outlays declined, the decline was moderated by a continuation in 1990 of several factors that have provided foreigners with opportunities and incentives to invest in the United States. The U.S. corporate restructuring that began several years ago made U.S. businesses available for foreign purchase. In an effort to become more efficient or to reduce debt incurred in financing leveraged buyouts, many corporations streamlined operations by selling off unprofitable units or units unrelated to their main lines of business. Although such transactions had occurred in previous years, they were particularly significant in 1990. In addition, the strategy of a number of European and other foreign multinational companies to expand geographically and to gain additional markets within industries that complement their core businesses led to a number of acquisitions of U.S. companies. Further, the ongoing public debate about the U.S. trade deficit may have encouraged some foreign manufacturers to build or acquire U.S. plants as a contingency against any measures that might limit their ability to service U.S. markets through exports.

Revisions.--Estimates for 1989 have been revised to reflect reports received too late to be included in the preliminary totals published last year. Total outlays were revised up from $64.6 billion to $71.2 billion, and the number of investments was revised up from 1,101 to 1,580 (tables 1 and 2A). Also in 1989, a correction to industry classification was made to reclassify an affiliate from retail trade to food products manufacturing.

Organization of the article.--The remainder of this article consists of two parts. The first part discusses investment transactions by industry, by country, and by source of funding; the second part presents selected data on the operations of the U.S. businesses acquired or established. In the analysis, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Investment Transactions

By type of investment, most outlays in 1990, as in past years, were for acquiring existing U.S. businesses ($56.8 billion) rather than for establishing new U.S. businesses ($7.7 billion) (table 3). By type of investor, most outlays--$51.9 billion--were made by U.S. affiliates; only $12.5 billion were made by the foreign direct investors themselves. However, according to data by source of funding, about one-half of total outlays of $64.4 billion were financed with funds provided by foreign parents or foreign (non-U.S.) affiliates of foreign parents; these funds included both those used directly to acquire or establish U.S. businesses and those provided to existing U.S. affiliates for the purpose of financing acquisitions and establishments. Existing U.S. affiliates financed the remaining one-half of total outlays, either from U.S. or foreign borrowing (other than from the foreign parent groups) or from internally generated funds. (For further discussion, see "Source of funding.")

Industry

By industry of the U.S. businesses acquired or established, the largest outlays, at $24.1 billion, were in manufacturing (table 4). Within manufacturing, outlays were largest in "other manufacturing" and in chemicals.

In "other manufacturing," outlays were $9.4 billion. The largest investment involved the acquisition of a Massachusetts-based manufacturer of abrasives and high-technology ceramics by the U.S. affiliate of a large French glass manufacturer. The acquisition reflects the French firm's long-term strategy of strengthening its position in industries that complement its primary businesses. The second largest transaction also involved a French company; the U.S. affiliate of a French tire manufacturer acquired an Ohio-based tire producer. As a result of this acquisition, which follows several other major mergers and acquisitions in the world tire industry, the French firm became the world's largest tire manufacturer.

In chemicals, where foreign investment in the United States was already substantial, outlays were $7.7 billion, and they were mostly accounted for by four investments, three of which involved outlays of $1 billion or more. Two of these investments were in pharmaceuticals and mainly reflected continuing consolidation in the pharmaceutical industry aimed at lowering research costs and gaining global markets. The largest investment was by a U.S. affiliate of a Swiss pharmaceuticals group that acquired a California-based biotechnology company--the largest company in its industry. In the second largest transaction, a French Government-owned chemical company that had been seeking opportunities to expand in the United States acquired a Pennsylvania-based pharmaceutical company. (In a separate transaction, the same French company purchased, through a U.S. affiliate, a large chemicals business based in New Jersey.) In the third largest transaction, a U.S. affiliate of a Japanese conglomerate acquired a Pennsylvania-based industrial chemicals manufacturer and, in the fourth largest transaction, a diversified New York-based drug manufacturer sold its household products business to the U.S. affiliate of a British consumer products group. As several other large U.S. drug companies have done recently, the manufacturer divested its non-health-care business in order to concentrate on more profitable pharmaceutical and consumer-health operations.

In other manufacturing industries, outlays were largest in machinery and metals. Outlays in machinery were $3.8 billion. The largest transaction was in electronic components and accessories: A U.S. affiliate of a Japanese manufacturer of electronic parts and equipment acquired a New York-based manufacturer of capacitors. In another large transaction, a Kentucky-based manufacturer of power tools and related parts was acquired by a German electrical and electronic equipment manufacturer.

In primary and fabricated metals, outlays were $2.1 billion. In the largest transaction, a British manufacturing company acquired an Ohio-based manufacturer of building and vehicle components. In another large transaction, a French Government-owned steel company purchased a large Pennsylvania-based producer of stainless steel. Additionally, the U.S. affiliate of a large Japanese steel company bought a minority interest in an Illinois-based steel company.

Outside manufacturing, outlays were largest, at $20.0 billion, in services. The outlays in services were mostly accounted for by six transactions, five of which involved outlays of $1 billion or more. Two of these transactions were in the motion picture industry. The largest transaction was the purchase, by the U.S. affiliate of a Japanese consumer electronics manufacturer, of a California-based entertainment conglomerate that has a major movie-studio subsidiary. (This transaction was the largest one reported in 1990, and it is the largest Japanese investment to date in the United States.) In a similar transaction in 1989, a large U.S. movie studio was acquired by another Japanese electronics producer. The second largest transaction was the purchase of another movie studio by the U.S. affiliate of an Italian financier. These three transactions reflect a major move by manufacturers of audio and video equipment (such as high-fidelity equipment, videocassette recorders, and televisions) and by providers of related services (such as movie theater operators) into the production of entertainment products (such as records, movies, and television programs).

Three of the six large transactions in services were in the hotel industry. In one of these transactions, a U.S. affiliate of a French hotel, catering, and tourism company acquired a Texas-based budget-motel chain. The U.S. company's well-known brand name in the economy-lodging field, the fastest growing and most profitable segment of the industry, made the acquisition particularly attractive. In the other two transactions, a nationwide hotel and motel chain was acquired by the U.S. affiliate of a leading British brewing company, and a California-based resort hotel was purchased by the U.S. affiliate of a Japanese real estate investor.

The last of the six large transactions in services was in the equipment rental and leasing industry. A California-based aircraft-leasing company was acquired by a U.S. affiliate with an ultimate beneficial owner (UBO) in the United States.(1)

In real estate, outlays were $6.6 billion. Japanese investors made numerous purchases. In the largest transaction, a real estate firm purchased a majority interest in a New York-based corporation that owns several well-known buildings.

In "other industries," outlays were $5.6 billion. In the largest transaction, the U.S. affiliate of a British communications company acquired a New York-based broadcasting and publishing company. This acquisition strengthened the communications company's position in the U.S. telephone market; in 1989, the company had acquired communications businesses in California and Washington State.

In insurance, outlays were $2.0 billion. The largest transaction was the merger of a New York-based insurance broker with a London-based insurance broker; it created the world's fourth largest insurance brokerage firm.

Country

Outlays are classified by country of UBO in tables 4, 5A, and 5B. In 1990, UBO's in 21 countries made at least one investment of $100 million or more. UBO's in Europe accounted for 56 percent of total outlays, and those in Asia and Pacific for 36 percent.

Within Europe, UBO's in the European Communities (EC(12)) accounted for 86 percent of outlays. Swiss UBO's accounted for most of the remainder. Of total outlays of UBO's in the EC(12), British and French UBO's accounted for 42 percent and 35 percent, respectively; UBO's in the Netherlands and Germany accounted for most of the remainder.

By country, British UBO's accounted for $13.1 billion of outlays, down from $23.0 billion in 1989. The decline may have reflected the recession in the United Kingdom, a shortage of cash and credit, and the reluctance of British banks to finance takeovers. Each of the five largest British investments--all $500 million or more--was in a different industry: "Other industries," services, chemicals, insurance, and metals. These transactions and most of the transactions alluded to hereafter were discussed in the preceding section of this article.

French outlays in 1990, at $10.9 billion, were almost triple the 1989 level. The increase reflects both the French Government's favorable attitude towards investment abroad and French companies' apparent strategy of investing in industries that complement their core businesses, of gaining market position, and of building industries to world-class size to withstand foreign competition as the European Community moves closer to implementing the 1992 single-market initiative. Of the six largest French investments, four--two in chemicals, one in metals, and one in wholesale trade--were undertaken by Government owned or controlled firms. Such firms also made a number of smaller investments in 1990.

Outlays of Netherlands UBO's were $2.4 billion, most of which was accounted for by the acquisition of an Illinois-based bank by the U.S. affiliate of a Netherlands bank and the acquisition of a California-based wholesaler of recorded music products by the U.S. affiliate of a consumer products conglomerate.

Outlays of German UBO's were $2.2 billion. All of the investments were under $500 million. The largest transaction was in chemicals: A New Jersey-based household products firm was acquired by the U.S. affiliate of a German manufacturing company.

Swiss UBO's accounted for $3.9 billion in outlays. The largest investment was the acquisition of the previously mentioned California-based biotechnology company.

Outlays of Japanese UBO's were $20.5 billion in 1990, up from $17.4 billion in 1989. Japanese investors accounted for 71 percent of total outlays in real estate and 54 percent of total outlays in services. In services, the largest transaction was the purchase of the major entertainment company by the Japanese consumer electronics manufacturer. Numerous hotel investments, including the resort hotel in California, also contributed substantially to the outlays in services. Japanese UBO's made two of the three largest investments in real estate, including the purchase of a majority interest in the New York-based real estate corporation. Other sizable Japanese outlays included one investment in pharmaceuticals and one in machinery.

Taiwanese UBO's accounted for $1.1 billion in outlays. The largest investments were the purchase of a Texas oil and gas exploration firm by the U.S. affiliate of the Government-owned energy company and the acquisition of a California-based bakery by Taiwan's largest food conglomerate.

Outlays of Canadian UBO's were $1.9 billion; the largest investment was the acquisition of a nationwide fast-food restaurant chain by the U.S. affiliate of a Canadian manufacturing company.

Source of funding

Of the $64.4 billion in total outlays in 1990, $32.0 billion, or nearly 50 percent, was funded by foreign parent groups, which consist of the foreign parents and the foreign (non-U.S.) affiliates of the foreign parents (table 6). Some of these funds financed investments made through U.S. affiliates, and some financed investments made directly by the foreign parents. Foreign-source funds were a relatively more important source of funds in 1989, when they totaled $48.2 billion and financed 68 percent of outlays. The reduction in the amount of total outlays financed with foreign-source funds contributed to the relatively low level of capital inflows for foreign direct investment in the United States in 1990.(2)

The remaining $32.4 billion in outlays was funded by U.S. affiliates from sources other than the foreign parent groups. For example, the U.S. affiliates may have borrowed the funds from unaffiliated foreign persons or from U.S. persons, or they may have generated the funds internally. In 1989, these other sources of funds financed $23.0 billion in outlays. The increase in the use of these funds maintained the high level of total outlays in 1990.

By country of UBO, a relatively large share--56 percent--of European outlays was financed by foreign parent groups. The percentage of financing by foreign parent groups--at 43 percent--was below average for investments of Asian and Pacific UBO's. Within Europe, the share of outlays of EC(12) UBO's financed by foreign parent groups was 58 percent. Within the EC(12), the share of French investment financed by foreign parent groups, at 70 percent, was particularly large, perhaps reflecting a tendency by Government-owned UBO's to rely mainly on funds generated, or obtained, in the home (investing) country. In contrast, only 46 percent of outlays for investments of British UBO's were financed by foreign parent groups. Within Asia and Pacific, the share of Taiwanese investment financed by foreign parent groups, at 54 percent, was slightly above average. Only 41 percent of outlays of Japanese UBO's were financed by foreign parent groups.

Selected Operating Data

Total assets of U.S. businesses acquired or established by foreign investors were $95.0 billion in 1990, down from $127.5 billion in 1989 (tables 7A and 7B). Assets of U.S. businesses acquired by foreigners, at $82.5 billion, were much larger than those of U.S. businesses established by foreigners, at $12.6 billion.

Assets in manufacturing and in services were $30.5 billion and $28.8 billion, respectively; together, these assets accounted for 62 percent of the total assets of U.S. businesses acquired or established by foreign investors in 1990. Within manufacturing, assets in "other manufacturing," at $10.9 billion, were largest. In services, the acquisitions of the entertainment conglomerate and of the California-based aircraft-leasing company accounted for a sizable share of total assets. Assets in real estate were also large.

Acquired businesses employed 393,000 workers. Within manufacturing, "other manufacturing" accounted for the largest share of these employees, mainly reflecting the acquisitions of the tire manufacturing company and of the manufacturer of abrasives and high-technology ceramics. Newly established businesses employed 11,000 workers.

Foreign investors obtained 309,000 acres of land as a result of acquisitions. Manufacturing affiliates accounted for 52 percent of all acreage obtained as a result of acquisitions. By establishing new businesses, including purchases of real estate, foreign investors obtained 166,000 acres. [Table 1, 2A, 2B, 3, 4, 5A, 5B, 6, 7A, 7B Omitted] [BEA's Survey of New U.S. Affiliates: Coverage and the Adjustment for Late Reports Omitted]

(1)The UBO is the first person in the ownership chain of the acquired or established U.S. business, beginning with the foreign parent, that is not owned more than 50 percent by another person. The foreign parent is the first person in the ownership chain. The country of UBO is often the same as that of the foreign parent, but it may be a different foreign country or, as in this case, the United States.

(2)Foreign-source funds used to acquire or establish U.S. affiliates are also included in U.S. capital inflows for foreign direct investment in the United States that are recorded in the U.S. balance of payments accounts. However, because these inflows also include funds that are used for other purposes, the two measures are not directly comparable.

The preliminary estimate of capital flows for foreign direct investment in the United States in 1990 was published in "U.S. International Transactions, Fourth Quarter and Year 1990," Survey of Current Business 71 (March 1991): 57. This estimate, at $25.7 billion, was lower than the $32.0 billion estimate of foreign-source funding. However, capital inflows are recorded as a net figure that includes components--namely, decreases in equity, reinvested earnings, and changes in U.S. affiliates' receivables from their foreign parent groups--that are unrelated to foreign funding of new affiliates and for which net outflows of $22.0 billion were recorded in 1990. In contrast, net capital inflows of $47.7 billion were recorded for the components of capital flows that could represent foreign-parent funding of acquisitions and establishments--namely, increases in equity and changes in U.S. affiliate payables to their foreign parent groups. Some of these inflows also financed the operations of existing U.S. affiliates.

It should be noted that the estimates of acquisitions and establishments of U.S. affiliates include some investments that were reported too late to be included in the preliminary estimate of capital inflows. The revised capital flow estimate to be published in the June 1991 issue of the Survey will include these late-reported transactions. Until then, comparisons between the data for outlays funded by foreign parent groups presented in this article and the data for total capital inflows for foreign direct investment in the United States should be made with caution. Furthermore, it should be noted that, when disaggregated by country, the outlays data in this article are shown by country of UBO, whereas the capital flow data are shown by country of foreign parent.
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Author:Fahim-Nader, Mahnaz
Publication:Survey of Current Business
Date:May 1, 1991
Words:3313
Previous Article:National income and product accounts.
Next Article:Valuation of the U.S. net international investment position.
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