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U.S. business enterprises acquired or established by foreign direct investors in 1984.

U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1984

STRONG U.S. growth and corporate restructuring were the key factors contributing to foreign direct investors' increased outlays to establish or acquire U.S. business enterprises in 1984. Outlays by foreign investors, either directly or through their existing U.S. affiliates, were $13.0 billion, up from $8.1 billion in 1983, but still well below the record $23.2 billion in 1981 (table 1). The increase occurred despite a decline in the number of investments, from 775 in 1983 to 552 in 1984. Total assets of the U.S. businesses acquired or established were $34.5 billion, compared with $22.3 billion in 1983.(1)

1. These data are from a BEA survey that covered (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 in 1984, and (2) new U.S. business enterprises established in 1984 by foreign investors or their U.S. affiliates. Acquisitions of additional equity in an existing U.S. affiliate are not covered. The data cover acquired or established U.S. business 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 accompanying tables. For 1984, 170 partial reports were filed; total assets of the U.S. business enterprises acquired or established were $46 million.

Because the data for 1984 are preliminary and will be revised to include late reports, the actual decline in the number of investments will not be as sharp as indicated above. Also, the increase in both outlays (the cost to investors of the ownership interests acquired or established) and total assets will be larger. For 1983, preliminary data were revised up 21 percent for the number of investments, 15 percent for outlays, and 10 percent for total assets of the acquired or established enterprises. Revised data for 1984 and preliminary data for 1985 will be published at this time next year.

After revision, data for 1984 will still indicate that the average level of outlays for each investment rose significantly. This increase occurred in most major industry groups, except manufacturing and real estate.

Strong U.S. economic growth was the most important factor contributing to the increase in outlays for new foreign investments in 1984. Although the economic recovery began in 1983, initial uncertainty about its strength may have caused some foreign investors to defer new investments until 1984. In 1984, real GNP in the United States grew 6.8 percent, much faster than in other industrialized countries.

The strong growth substantially improved earnings--as well as the outlook for future earnings--of many U.S. businesses, making them more attractive candidates for acquisition. Their attractiveness was further enhanced by relatively stable stock prices during 1984. These factors supplemented more traditional reasons to invest in the United States, such as access to a large homogeneous market and political stability.

Earnings of existing U.S. affiliates also substantially improved. In addition, foreign parent companies' earnings improved somewhat, reflecting the more limited recovery abroad and, in some cases, increased earnings from exports to the United States. The improved earnings of both U.S. affiliates and their foreign parents provided additional funds for new investments in the United States.

Corporate restructuring in the United States was the other key factor contributing to the increase in outlays for new foreign investments. Many diversified U.S. companies found that some of their lines of business performed poorly, particularly during the 1981-82 recession, and weakened their overall profitability. They sought to streamline their operations by selling off subsidiaries or divisions that performed poorly and were unrelated to their main lines of business. A number of U.S. companies may have also been prompted to sell operating assets to obtain capital for expansion into more promising areas or to pay down debt incurred to finance domestic acquisitions. The willingness of U.S. companies to sell operating assets supplied many candidates for acquisition by foreign investors.

The dollar continued to appreciate against most major foreign currencies in 1984. The overall impact of the appreciation on foreign investors' acquisition and establishment of U.S. businesses is difficult to quantify. Many investments, particularly those involving large outlays, represent a long-term commitment to do business in the United States and, thus, appear not to be materially influenced by short-term fluctuations in the value of the dollar. Also, many investments are financed with dollars, either from earnings of existing U.S. affiliates of from borrowing in U.S. capital markets. To the extent that investments are dollar sensitive, appreciation may have had both negative and positive effects. On the one hand, dollar appreciation raises the cost in foreign currency of U.S. assets. On the other hand, it increases the foreign currency value of dollar investment income. The net impact of these offsetting effects on 1984 investments is unclear.

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, is used to supplement BEA's survey data.

Investment Transactions

As in previous years, most outlays in 1984 were for acquisition of existing businesses rather than establishment of new ones. Foreign investors spent $10.6 billion to acquire 223 U.S. businesses, and $2.4 billion to establish 329 new U.S. businesses. By type of investor, $9.6 billion of total outlays were by existing U.S. affiliates, compared with $3.5 billion by foreign direct investors themselves.

New foreign investments were dominated by several large transactions; the 55 most costly investments accounted for only 10 percent of the number of investments, but for 77 percent of total outlays.

Industry

By industry of the U.S. businesses acquired or established, outlays in petroleum were $3.1 billion, 24 percent of the total (tables 2 and 3). The U.S. affiliate of an oil services company with headquarters in the Netherlands Antilles acquired two oil services companies. The U.S. affiliate concentrated its investments in its primary industry, after earlier diversification weakened profits. A U.S. partnership involving a British petroleum company acquired a U.S. petroleum company, when its bid was favored over an unfriendly takeover attempt by another U.S. investor. In another large transaction, a Canadian gas pipeline company, which wanted to expand into the U.S. oil and natural gas industry, acquired an oil company from a U.S. company that was selling assets unrelated to its principal businesses--communications and real estate.

Outlays to acquire or establish manufacturing affiliates were $2.5 billion, 19 percent of the total. Two of the largest investments were by Japanese companies, both trying to increase their share of the U.S. market. In one, a Japanese steelmaker, faced with stagnant growth in domestic demand, formed a partnershp with a U.S. steelmaker. In the other, a Japanese automaker launched a joint venture with a U.S. automaker. The U.S. affiliate of a British publishing company, already the owner of several U.S. newspapers, acquired a major Midwestern daily. In paper products, the U.S. affiliate of a British company acquired a Midwestern paper mill, and a German company acquired a New England paper mill. Large acquisitions also occurred in chemicals, plastics, and furniture manufacturing.

One of the largest investments in 1984 was the acquisition of a majority interest in the mining unit of a U.S. consumer products and electronics company by the U.S. affiliate of a large Australian industrial holding company. The U.S. company sold its mining interests in a shift away from natural resources toward high technology. In another large transaction, the same Australian company acquired a Southwestern energy company through a tender offer by its U.S. affiliate.

Outlays were $0.8 billion in banking and $0.7 billion in finance; the two industries combined accounted for 12 percent of the total. A major Canadian bank, which already had a sizable U.S. investment, acquired a large Midwestern commercial bank. Because Canadian banks are prohibited from doing trust business in Canada, the Canadian bank was particularly interested in acquiring the U.S. bank's large trust department. A major Japanese bank, which sought to expand its commercial finance and international trade businesses, acquired two commercial finance units of a U.S. company through its existing U.S. affiliate. A third large transaction involved a New York bank that sold one of its units to a major British bank.

Outlays in retail trade were $1.0 billion, 8 percent of the total. The U.S. affiliate of a large Canadian clothing retailer acquired three U.S. clothing retailers in separate transactions. The Canadian company, already among the largest in its industry in Canada, sought further growth in the United States. In another transaction, a German-owned wholesale grocer, with headquarters in the Southwest, acquired a supermarket chain and wholesale grocer based in upstate New York. Also, the U.S. affiliate of a Canadian holding company acquired a U.S. drugstore chain.

Outlays to acquire or establish wholesale trading companies were $0.8 billion, 6 percent of the total. Four foreign companies made large acquisitions to increase their control over the distribution of their products. Two British liquor companies, which wanted direct control over marketing strategy for their exports to the United States, acquired the importers of their major brands. A British pharmaceutical company, after selling its agricultural chemical operations in order to concentrate on its more profitable health care business, acquired a U.S. distributor of laboratory and scientific instruments. A Canadian mining company purchased a metals distribution unit from a U.S. liquor and chemical company. In recent years, metals manufacturing and distribution had accounted for a declining share of the U.S. company's revenues; several of its metal units were closed in 1983, and the sale of the metals distribution operation in 1984 reinforced its movement away from metals.

Outlays in real estate were $1.5 billion in 1984, 12 percent of the total. 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 in other industries. The preliminary estimate for 1984 is $1.2 billion lower than the revised estimate for 1983, but only $0.6 billion lower than the preliminary estimate for 1983. The decline in outlays in real estate probably reflected continued slow appreciation in U.S. real estate values last year. Also, appreciation of the dollar may have deterred individuals and other small investors from investing.

Country

Outlays are classified by country of ultimate beneficial owner (UBO) in table 4.(2) European UBO's accounted for $5.1 billion of outlays, up slightly from 1983. These outlays were 40 percent of the 1984 total, a smaller share than in the previous 5 years combined, when European UBO's accounted for nearly 60 percent of total outlays. UBO's in many European countries--including France, Germany, Italy, and Switzerland--had smaller outlays than in 1983. On the other hand, outlays accounted for by UBO's in the United Kingdom increased substantially, to $3.1 billion, the largest total for any single country.

2. Investment outlays can be classified by country of foreign parent, as well as by country of ultimate beneficial owner (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 the 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 the set of supplementary tables to this article (see box).

Outside Europe, outlays for 1984, as well as the increase in outlays from 1983, were concentrated among UBO's in Canada, Japan, Australia, and the Netherlands Antilles. For each of the last two countries, a single UBO accounted for almost all of the outlays; for Canada and Japan, a number of UBO's had large outlays.

Selected Operating Data

Total assets of the U.S. businesses acquired or established in 1984 were $34.5 billion, up from $22.3 billion in 1983 (tables 5A and 5B). Increases were largest in banking, petroleum, mining, and services.

U.S. business acquired in 1984 had assets of $28.3 billion. The assets were concentrated in banking, finance, petroleum, metals manufacturing, and mining. Except in petroleum, a single acquisition accounted for most of the total assets in each industry. In petroleum, several large acquisitions, described earlier, accounted for the assets. Acquired businesses employed 142,000 workers, of which one-third were in manufacturing and nearly one-fourth were in retail trade. In retail trade, the previously mentioned U.S. drugstore chain acquired by the U.S. affiliate of a Canadian holding company was the largest employer. Acquired businesses owned 150,000 acres of U.S. land, of which one-half were owned by the mining unit of a U.S. company acquired by the U.S. affiliate of an Australian holding company.

U.S. businesses established in 1984 had assets of $5.8 billion, employed 3,000 workers, and owned 236,000 acres of land. Nearly one-half of the acres owned by these businesses were in real estate; most of the remainder were in forestry and agriculture. Excess capacity and a high level of Canadian exports depressed the U.S. timber industry, and consequently a number of companies in that industry were under pressure to improve their cash flow by selling timberland. In addition, several diversified U.S. companies, which had acquired timberland as a hedge against inflation in the seventies, sold these assets in last year's less inflationary environment.

Table: 1.--Investments, Investors, and Investment Outlays, 1979-84

Table: 2.--Investment Outlays by Industry of U.S. Business Enterprise, 1983-84

Table: 3.--Investment Outlays by Industry of U.S. Business Enterprise, 1979-84

Table: 4.--Investment Outlays by Country of Each Ultimate Beneficial Owner, 1979-84

Table: 5A.--Total Assets, Acres of Land Owned, Sales, Net Income, and Employment of U.S. Business Enterprises Acquired or Established in 1983, by Industry of U.S. Business Enterprise

Table: 5B.--Total Assets, Acres of Land Owned, Sales, Net Income, and Employment of U.S. Business Enterprises Acquired or Established in 1984, by Industry of U.S. Business Enterprise
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Publication:Survey of Current Business
Date:May 1, 1985
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Previous Article:International travel and passenger fares, 1984.
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