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U.S. business enterprises acquired or established by foreign direct investors in 1991.

LAST YEAR, foreign direct investors sharply reduced their outlays for acquiring or establishing U.S. business enterprises. These outlays, made either directly or through their U.S. affiliates, dropped 66 percent in 1991 to $22.6 billion from $65.9 billion in 1990 (table 1).(1) The drop mirrored a sharp worldwide decline in the value of mergers and acquisitions and brought outlays for new foreign direct investments in the United States to their lowest level since 1984.

[TABULAR DATA 1 OMITTED]

By industry, the decline in outlays was particularly sharp in services and manufacturing--especially in "other manufacturing" and in primary and fabricated metals. Outlays increased in only two industries-machinery manufacturing and retail trade. By country, the decline in outlays was largest for ultimate beneficial owners (UBO's) in the United Kingdom and Japan.(2) The only country with a significant increase in outlays was Kuwait.

The sharp reduction in outlays in 1991 reflects the cumulative effects of factors that had also reduced outlays (by 7 percent) in 1990: A continuing economic slowdown in the United States and in major investing countries, coupled with limited availability of funding. In the United States, the economic slowdown that began in 1989 became a downturn in the second half of 1990, and business conditions remained sluggish throughout 1991. U.S. banks, faced with higher rates of loan defaults and stricter capital requirements, became less willing to finance mergers and acquisitions. In Europe, some major investing countries, especially the United Kingdom, remained in recession, and in Japan, investors found their ability to finance new foreign investments constrained by reduced earnings, weak stock prices, lending restrictions on banks, and higher interest rates. In addition, several factors may have attracted some investment funds away from the United States: Increased economic integration within the European Communities (EC(12)), market-oriented reforms in Eastern Europe, rapid economic growth in East Asia, and an improved investment climate in Latin America.

As in past years, acquisitions accounted for most--74 percent in 1991--of total outlays. However, large investments did not dominate the results to the same extent as in the past. In 1991, two investments of $1 billion or more accounted for 14 percent of outlays, and 41 investments of $100 million or more accounted for 59 percent of outlays. In contrast, in 1990, 11 investments of $1 billion,or more accounted for 40 percent of outlays, and 85 investments of $100 million or more accounted for 73 percent of outlays. (See tables 2.1 and 2.2.)

[TABULAR DATA 2.1 and 2.2 OMITTED]

U.S. affiliates that were newly acquired or established in 1991 employed 228,000 persons, nearly all of whom worked for nonbank affiliates. By comparison, total employment by all nonbank U.S. affiliates in 1990, the latest year for which such data are available, was 4,705,000, which, in turn, represented 5.0 percent of total employment by all nonbank U.S. businesses.(3)

Newly acquired or established affiliates had total assets of $144.9 billion, of which $109.0 billion were held by nonbanks. By comparison, total assets of all nonbank U.S. affiliates at yearend 1990 were $1,529.8 billion. Comparable all-U.S.-business data on assets are available only for manufacturing. In that industry, total assets of newly established or acquired affiliates were $12.2 billion in 1991. By comparison, the total assets of U.S. affiliates in manufacturing were $489.8 billion in 1990, which, in turn, represented 18.6 percent of the total assets of all U.S. businesses in manufacturing.(4)

Revisions.--The estimates for 1991 are preliminary and will be revised next year. Estimated outlays for 1990 have been revised up from $64.4 billion to $65.9 billion, and the estimated number of investments was revised up from 1,565 to 1,617 (tables 1 and 2.1). As a result of the introduction last year of bias adjustments for late reports, the revisions for 1990 are much smaller than those for previous years.(5)

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

As in past years, most outlays in 1991 were for acquiring existing U.S. businesses ($16.8 billion) rather than for establishing new U.S. businesses ($5.8 billion) (table 3). Most of the outlays were made by U.S. affiliates ($14.4 billion) rather than by the foreign direct investors themselves ($8.2 billion); however, some of the investments made by existing U.S. affiliates were financed with funds provided by foreign parent groups.(6) (Transactions by source of funding are discussed in more detail later in the article.)

[TABULAR DATA 3 OMITTED]

By industry

By industry of the U.S. businesses acquired or established, outlays in manufacturing, at $10.6 billion, were the largest (table 4). Within manufacturing, outlays were largest in machinery, chemicals and allied products, and "other manufacturing."

[TABULAR DATA 4 OMITTED]

In machinery, outlays were $5.0 billion. Four transactions accounted for most of the outlays. First, in the largest transaction reported in 1991, a French electrical equipment company acquired an Illinois-based manufacturer of electrical distribution equipment. This acquisition, which reflects rapid worldwide consolidation in the electrical equipment industry, strengthened the French company's global presence. Second, a U.S. affiliate of a French telecommunications and engineering company acquired a unit of a Pennsylvania-based producer of telecommunications transmission systems and products and merged it into its own operations. Third, a Japanese company acquired an interest in the Connecticut-based unit of a diversified machinery-equipment manufacturer. Fourth, a U.S. affiliate of an Italian agricultural and earth-moving equipment company acquired the Pennsylvania-based farm-machinery subsidiary of an auto manufacturer.

In chemicals, outlays were $3.0 billion. In the largest transaction in chemicals, a diversified U.S. manufacturing affiliate of a Canadian company established a joint venture with a major U.S. pharmaceuticals company; the venture represents a continuing consolidation in the pharmaceuticals industry aimed at lowering research and development costs and at gaining global markets. In the second largest transaction, a German energy and chemicals company acquired a Texas-based producer of specialty and commodity chemicals. In another transaction, a U.S. affiliate of a Swiss pharmaceuticals group acquired a California-based biotechnology company.

Outlays in "other manufacturing" were $1.4 billion. The largest transactions were the acquisition of the Alabama-based unit of a tire manufacturer by a U.S. affiliate of a Dutch chemical company and the acquisition of a Washington-based manufacturer of aggregates and ready-made concretes by a U.S. affiliate of a Belgian cement maker.

Outside manufacturing, outlays were largest, at $2.9 billion, in real estate. In the largest transaction, a U.S. affiliate of a real estate investment trust controlled by the Kuwaiti Government purchased an office building in New York.

In insurance, outlays were $2.1 billion. About one-half of the outlays were accounted for by an investment in a New York-based insurance company by a large French insurer that had no prior U.S. operations. In another large transaction, a U.S. affiliate of a Dutch UBO acquired the group health and disability insurance unit of a New Jersey-based insurer and merged it into its own operations.

In services, outlays were $2.0 billion. In the largest transaction, a U.S. affiliate of a Japanese consumer electronics manufacturer acquired the home video business of a New York-based broadcasting company. In separate transactions, a U.S. affiliate of a Swiss company acquired two computer software companies--one based in Illinois and the other in New Jersey--and merged them into its own operations. Two other large transactions in services were in the hotel industry: A U.S. affiliate of a Swiss food conglomerate purchased a hotel in the District of Columbia, and a U.S. affiliate of a French hotel, catering, and tourism company acquired a nationwide motel chain.

In finance (except banking), outlays were $1.9 billion. In the largest transaction, a U.S. affiliate of a Japanese bank acquired the commercial finance unit of a New Jersey-based bank. In another large transaction, a Japanese bank, in conjunction with its U.S. affiliate, formed a leasing and finance unit in New York; in a separate transaction, the same bank established a securities subsidiary in New York. In addition, a U.S. affiliate of a Swiss bank acquired the asset management unit of a large New York-based bank, and a U.S. affiliate of a Canadian financial firm purchased a New York-based savings and loan association.

In retail trade, outlays were $1.4 billion. Most of the outlays were accounted for by two large transactions: The purchase of a New York-based supermarket chain by a U.S. affiliate of a Dutch food retailer, and the joint purchase of a Texas-based convenience-store chain by two Japanese companies.

By country

Outlays are classified by country of UBO in tables 4, 5.1, and 5.2. In 1991, UBO's in 11 countries had at least one investment of $100 million or more. UBO's in European countries accounted for $12.8 billion, or 56 percent, of total outlays, and those in Asia and Pacific countries, mainly Japan, accounted for $5.7 billion, or 25 percent. Within Europe, most outlays were accounted for by UBO's in the EC(12). Most of the transactions covered in this section were mentioned in the preceding section on outlays by industry.)

[TABULAR DATA 5.1 and 5.2 OMITTED]

Outlays of Japanese UBO's were $5.1 billion, down sharply from $19.9 billion in 1990. Despite the sharp decline, outlays of Japanese UBO's remained the largest of any single country in 1991. Several factors, both in Japan and in the United States, contributed to the decline. In Japan, a sluggish domestic economy, declining stock prices, and increases in finance costs reduced corporate profits and constrained the ability of investors to finance new investments. In addition, the Japanese Government imposed restrictions on lending by financial institutions to finance real estate. In the United States, outlays were reduced both by the earlier-mentioned factors that depressed investments by foreigners generally and by several factors specific to the real estate industry, in which Japanese UBO's have been the largest foreign investors. Factors that have diminished Japanese interest in new U.S. real estate investments include reduced values of many Japanese-owned properties, depressed rental rates for commercial office space, and high vacancy rates. Japanese UBO's accounted for only 33 percent of total outlays in real estate in 1991, down from 57 percent in 1990. The largest transaction of Japanese UBO's was the purchase of the finance unit of the New Jersey-based bank. The second largest transaction was the joint purchase of the Texas-based convenience-store chain by two Japanese companies. Other sizable Japanese acquisitions included one in services, two in machinery, and one in pharmaceuticals.

Outlays of French UBO's were $4.7 billion in 1991, down from $10.2 billion in 1990. The two largest transactions--each of $1 billion or more--were the acquisitions of the Illinois-based manufacturer of electrical distribution equipment and the New York-based insurance company.

Outlays of Canadian UBO's were $2.6 billion, down from $3.4 billion. The largest investment was the joint venture between the U.S. affiliate of a Canadian company and the U.S. pharmaceuticals manufacturer.

Outlays of British UBO's were $1.8 billion, down sharply from $13.1 billion in 1990. The sharp decline may have reflected the prolonged recession in the United Kingdom and a general shortage of cash and credit. The largest investment by British UBO's was the acquisition of a Kentucky-based spirits company by a U.S. affiliate of a British distiller. In addition, British UBO's accounted for the largest share of total outlays in primary and fabricated metals; the largest transaction in that industry was the acquisition of a South Carolina-based manufacturer of hoses, pipes, and flexible ducting by a U.S. affiliate of a British aerospace and medical equipment manufacturer.

Outlays of German UBO's were $1.7 billion, down from $2.4 billion. The largest investment by a German UBO was the acquisition of the Texas-based producer of specialty and commodity chemicals. In addition, German investors accounted for the largest share of outlays in wholesale trade; the largest transaction in that industry was the acquisition of an Illinois-based consumer-product business by a U.S. affiliate of a German wholesale trade company.

Outlays of Netherlands UBO's were $1.6 billion, down from $2.2 billion. Most of the 1991 outlays reflected two previously mentioned transactions--the purchases of the New Jersey-based insurance company unit and of the New York-based supermarket chain.

By source of funding

The sharp decline in total outlays in 1991 was accompanied by a sharp decline in funding both by foreign parent groups and by existing U.S. affiliates. However, funding by foreign parent groups fell less than that by U.S. affiliates, thus increasing the relative importance of parent groups in financing transactions. of the $22.6 billion in total outlays in 1991, $13.1 billion, or 58 percent, was funded by foreign parent groups (table 6). Some of these funds financed investments made through U.S. affiliates, and some financed investments made directly by foreign parents. Funding by foreign parent groups was a relatively less important source of funds in 1990, when it totaled $32.5 billion and financed 49 percent of outlays.

[TABULAR DATA 6 OMITTED]

The remaining $9.5 billion, or 42 percent, of 1991 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 internary. In 1990, these other sources of funds financed $33.4 billion, or 51 percent, of outlays.

By industry, the percentage of financing by foreign parent groups was significantly above average in banking, insurance, and "other industries" and significantly below average in petroleum, services, and retail trade.

By area, the percentage of financing by foreign parent groups was above average for the investments of many UBO's in Europe and in Asia and Pacific and below average for those of UBO's in Canada and the Middle East. Within Europe, the share of German investment financed by foreign parent groups was particularly large; in contrast, the share of British investment financed by foreign parent groups was considerably below average.

Selected Operating Data

In contrast to the sharp decline in outlays, the total assets of U.S. businesses acquired or established by foreign direct investors rose in 1991 to $144.9 billion from $112.0 billion (tables 7.1 and 7.2). These divergent movements primarily reflect a shift in the industry composition of investments: More assets were concentrated in the highly leveraged industries of insurance, banking, and finance (except banking), which tend to have assets that are large in relation to owners' equity.

[TABULAR DATA 7.1 OMITTED]

The assets of U.S. businesses acquired by foreigners in 1991, at $133.2 billion, were much larger than those of U.S. businesses established by foreigners, at $11.7 billion. Assets in insurance, banking, and finance (except banking) accounted for over 80 percent of the total assets of U.S. businesses acquired or established. In insurance, the assets mainly reflected the acquisition of the New York-based insurance company; in banking, assets mainly reflected the purchase of a minority interest in a New Jersey-based bank by a Spanish bank; and in finance (except banking), assets mainly reflected the acquisition of the New York-based savings and loan association. In manufacturing, assets were $12.2 billion; they were largest, at $6.o billion, in machinery.

Acquired businesses employed 213,000 workers. Manufacturers accounted for the largest share--42 percent--of these employees; the share accounted for by retail trade was also large, at 31 percent. Newly established businesses employed 15,000 workers.

Foreign investors obtained 266,000 acres of land as a result of acquisitions. Insurance affiliates accounted for a majority of all acreage obtained as a result of acquisitions; most of their land was held for investment purposes. By establishing new businesses, including purchases of real estate, foreign investors obtained 65,000 acres.

Tables 7.1 and 7.2 follow.

Data Availability

Only summary data are published in this article. A set of supplementary tables containing detail o of investments and investors for 1987-90 and on investment outlays and selected operating data for 1 available in late july, for $10.00, from the Public Information Office, Order Desk, BE-53, Bureau of U.S. Department of Commerce, Washington, DC 20230. Visa or MasterCard orders may be placed by teleph 523-0640. When ordering, refer to the "BE-13 Supplementary Tables for the May 1992 Survey Article," 50-92-20-105, and make checks payable to the Bureau of Economic Analysis. Comparable tables for 1980 No. 50-89-20-106, are also available for $18.00.

In addition to the data on new foreign direct investments presented here, BEA also publishes estim balance of payments flows and the annual direct investment position for new and existing investments The position estimates will appear in the June 1992 Survey; More detailed estimates will follow in t Estimates covering the operations of U.S. affiliates of foreign companies are also available from BE in a benchmark year, from its quinquennial benchmark survey of foreign direct investment in the Unit most recent estimates appear in this issue of the Survey in "U.S. Affiliates of Foreign Companies: O which presents revised estimates for 1989 and preliminary estimates for 1990. (1.) These data are from BEA's annual survey of new foreign direct investments in the United States, which covers (1) existing U.S. business enterprises in which foreign investors acquired, directly or through their U.S. affiliates, at least a 10-percent voting interest, and (2) new U.S. business enterprises established by foreign investors or their U.S. affiliates. Acquisitions of additional equity or voting interests in existing U.S. affiliates are not covered.

The data are limited to U.S. enterprises that had total assets of over $1 million or that owned at least 200 acres of U.S. land in the year they were acquired or established. U.S. businesses that did not meet these criteria were required to fill partial reports, primarily for identification purposes, but the data from these reports are not included in the accompanying tables. For 1991, total assets of the U.S. business enterprises that filed partial reports were only $177 million, or about 0.1 percent of the total assets of $144.9 billion of the U.S. enterprises that met the criteria for filing a complete report. (2.) The transactions discussed in this article are classified by country of UBO. 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 foreign 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 the United States. "Person" is broadly defined to include any individual, corporation, branch, partnership, associated group, association, estate, trust, or other organization and any government (including any corporation, institution, or other entity or instrumentality of a government). (3.) These data are from table 1 of "U.S. Affiliates of Foreign Companies: Operations in 1990" elsewhere in this issue. (4.) These data are from table 9 of the article cited in footnote 3. As discussed in that article, because of the importance of acquisitions as a source of growth in foreign direct investment in the United States and because the assets of an acquired company are often revalued following the acquisition, the portion of assets that has been recently revalued is probably higher for U.S. affiliates than for all U.S. businesses. Because such asset revaluations tend to be upward, the measured U.S. affiliates' share of the total assets of all U.S. businesses in manufacturing is probably somewhat higher than it would be if the assets of both groups of businesses could be valued on a uniform basis. For the same reason, the assets of new U.S. affiliates may be overstated relative to the assets of either all U.S. businesses or all U.S. affiliates. (5.) For information on the adjustments, see "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1990," (May 1991): 31. (6.) A foreign parent group consists of the foreign parent(s) and their foreign (non-U.S.) affiliates.
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Author:Fahim-Nader, Mahnaz
Publication:Survey of Current Business
Date:May 1, 1992
Words:3480
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