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U.S. business enterprises acquired or established by foreign direct investors in 1988.

OUTLAYS by foreign direct investors to acquire or establish U.S. business enterprises increased sharply to $65.0 billion in 1988 from $40.3 billion in 1987. Both the record level of outlays and the sharp increase in them are attributable to a number of very sizable investments made in 1988.

During the past 5 years, outlays have risen at an average rate of 55 percent per year, while the overall number of investments has increased at an average rate of only 7 percent. This disparity reflects a sharp increase in the average size of investments. In 1988 alone, the number of investments of $1 billion or more doubled from 6 in 1987 to 12 (table 2A); 5 of these investments in 1988 were $2 billion or more, compared with only 1 in 1987. Investments of $1 billion or more accounted for 45 percent of total outlays in 1988, compared with 23 percent in 1987; they accounted for most-four-fifths-of the increase in 1988 outlays.

The ongoing strategy of several large foreign multinational companies to expand and diversify beyond their home markets has contributed to the increase in large investments and the average size of these investments. Foreign multinationals are generally seeking to acquire U.S. companies that can round out their global market position, add manufacturing capability, provide access to new technology, or furnish a well-known brand name. The increasing number of large U.S. companies purchased by foreigners also reflects the availability, in several developed countries, of substantial funds for investment.

Probably contributing to the increase in investment outlays in 1988 was con- cern about possible U.S. measures to restrict foreign merger and acquisition activity. Concern was exacerbated by passage of the Omnibus Trade and Competitiveness Act of 1988, which included an amendment giving the President power to block foreign mergers and acquisitions on grounds of national security.

Several factors that have contributed to the increase in foreign direct invest- ment in the United States in recent years continued to encourage investment in 1988. The brisk pace of U.S. economic growth has made U.S. companies attractive to foreigners by increasing the potential profitability of the acquired company. Also, growth in other developed countries, particularly in the United Kingdom, Japan, and Canada, has encouraged investment here by raising foreign companies' profitability and providing them with the funds needed for investment. A large homogeneous consumer market, political stability, and an advanced technological base in the United States have also continued to give foreigners incentives to invest here. In addition, corporate restructuring in the United States, which has led many companies to shed units that were unprofitable or unrelated to their main lines of business, has continued to provide investment opportunities for foreigners. The cumulative effect of dollar depreciation against several major currencies probably induced some foreign firms to shift operations to the United States. Dollar depreciation lowers both the cost of acquiring or establishing U.S. enterprises and the foreign currency value of income from investments in the United States. Because these effects are offsetting, small fluctuations in the value of the dollar may have little impact on direct investment. However, because the dollar has depreciated sharply since 1985, foreign firms may have had an incentive to sihft more of their operations to the United States so that their expenses, as well as their sales, would be denominated in dollars-a strategy that would help them to avoid increasing prices to U.S. consumers.

The first part of this article discusses investment transactions by industry and by country, and 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.

Revisions.-Each year, preliminary data for the previous year are revised up to include survey reports received since publication of these data the year before. Typically, the revisions to investment outlays (the cost to investors of the ownership interests acquired or established) are considerably smaller than those to numbers of investments because every effort is made to include large transactions in the preliminary data. The revisions in the data on new investments have been large in past years, reflecting the large number, and total value, of investments for which reports were received too late for inclusion in preliminary totals. The 1987 revisions are particularly large-outlays were revised to $40.3 billion from $30.5 billion and the number of investments to 978 from 557-because the 1987 benchmark survey of foreign direct investment in the United States brought to light investments, mainly small ones, that had not been previously reported to BEA.

Investment Transactions

By type of investment, most outlays in 1988, as in past years, were for acquiring existing U.S. businesses ($60.0 billion) rather than for establishing new U.S. businesses ($5.0 billion). By type of investor, $48.6 billion of total outlays were by existing U.S. affiliates of foreign direct investors, rather than by the foreign direct investors themselves. Industry

The 1988 increase in outlays was widespread among industries of the U.S. businesses acquired or established. Substantial increases occurred in all major industry groups except services, real estate, and finance (except banking). In services and real estate, outlays remained sizable, at $4.7 billion and $2.8 billion, respectively, despite the decrease from 1987 levels. Outlays in manufacturing were $31.6 billion; more than one-half of these outlays were in "other manufacturing," mainly in publishing and rubber products. Other sizable outlays in manufacturing were in machinery and in primary and fabricated metals; one or two large transactions accounted for more than one-half of the outlays in each of these industries. Outside manufacturing, outlays were largest in retail trade, at $8.0 billion, and in insurance, at $5.8 billion. Sizable outlays also occurred in petroleum, other industries,' wholesale trade, and banking. One or two large transactions accounted for more than one-half of the outlays in each industry except petroleum.

In "other manufacturing," outlays were $16.6 billion, almost one-half of which were attributable to three large investments. The acquisition of a Pennsylvania-based magazine publisher by a U.S. affiliate of a large Australian communications concern represented the largest acquisition ever in the U.S. publishing industry and made the Australian company the largest U.S. magazine publisher in terms of circulation. In another large transaction, a British printing, publishing, and communications concern acquired a New York-based publishing and information services concern. This acquisition is the largest in a series of acquisitions of U.S. publishers that reflect the British company's strategy to build a worldwide communications business. The third large transaction in other manufacturing" was the acquisition of an Ohio-based tire manufacturer by a Japanese tire manufacturer. This acquisition, which represents the largest single investment to date by a Japanese investor, was made to enable the Japanese manufacturer to expand in the U.S. tire market. The acquired company will sell tires to large U.S. automobile manufacturers as well as to Japanese auto manufacturers producing in the United States.

In machinery, outlays were $6.9 billion, more than one-half of which were attributable to two large Japanese investments. In one transaction, a New York-based record company was acquired by a U.S. affiliate of a Japanese manufacturer of electronic products, which made the acquisition in order to diversify beyond the highly competitive consumer electronics market. In the other transaction, an Illinois-based manufacturer of computers and electrical products was acquired by a U.S. affiliate of a Japanese metal, petroleum refining, and petrochemical concern. The Federal Government approved the acquisition on condition that the U.S. company's defense operations be put into a trust to be run by the company's current management. The Japanese company made the acquisition in order to obtain access to the U.S. company's research and development expertise in electronic parts manufacturing-particularly in the manufacture of copper foil, a material used @in printed circuit boards.

Outlays in primary and fabricated metals were $3.3 billion. Again, two investments accounted for more than one-half of the total. In one transaction, an Illinois-based manufacturer of metal cans was acquired by a U.S. affiliate of a French Government-owned aluminum manufacturer, which has acquired two other U.S. packaging concerns in recent years. The French company has now become one of the largest packaging concerns in the world. In the other transaction, a New York-based manufacturer of water heaters and air conditioners was acquired by a Japanese manufacturer of similar products as a means of extending its business to the U.S. market, where it had previously had no presence.

Outlays in food products were $2.9 billion., In the largest transaction, a Florida-based producer of orange juice was acquired by a Canadian producer of alcoholic beverages. The Canadian company made the acquisition in order to diversify its product line in the face of declining alcoholic beverage consumption in the United States.

Outside manufacturing, outlays in retail trade, at $8.0 billion, were Mostly accounted for by the largest single transaction in 1988, in which a U.S. affiliate of a Canadian real estate developer and retailer acquired a large,

Ohio-based department store chain. Parts of the acquired company were later divested to help finance the purchase. With this acquisition and another made in 1986, the Canadian developer is now the largest department store retailer in the United States in terms of sales.

Outlays. In insurance were $5.8 billion and were mostly for the acquisition of@ a California-based automobile and home insurer by a U.S. affiliate >f a British tobacco, retailing, and financial, services concern. The acquisition, which was made to- fullfil the British company's long-term strategy of diversifying away from its tobacco products business, followed a lengthy takeover effort.

Outlays in petroleum were $4.0 billion. The largest investment was by a Saudi Arabian Government-owned oil company,, which acquired a 50-percent interest in a large U.S. oil company's refining assets and distribution system in the Eastern United States. As a result of the transaction, the Saudi Arabian company obtained a sizable market for its oil and the U.S. company obtained a reliable supply of crude oil for its extensive distribution system.

Outlays in other industries," at $3.5 billion, were mostly in construction. In the largest transaction, a Pennsylvania-based construction company was acquired by a U.S. affiliate of a British road builder.

In wholesale trade, outlays were $2.3 billion and were mostly accounted for by the acquisition of an Illinois-based food wholesaler and corn sweetener manufacturer by a U.S. affiliate of a British sugar refiner. The British company intends to sen the food business in order to concentrate on the corn sweetener business.

Outlays in banking were $1.8 billion. The two largest investments were by British investors. A New Jersey-based bank was acquired by a U.S. affiliate of a British bank to help build a large regional bank in the Northeast, and a Rhode Island-based regional bank was acquired by a British bank. Other investments include the acquisition of a New Hampshire-based bank by a U.S. affiliate of an Irish bank seeking to reduce its dependence on the highly regulated Irish banking industry and the acquisition of an Illinois-based bank by a U.S. affiliate of a Netherlands bank.

Unlike other nonmanufacturing industries, outlays in services, real estate, and finance (except banking) decreased from 1987 levels. In services, outlays were $4.7 billion, down from $7.6 billion in 1987. Almost one-half of the outlays were for hotels. The two largest investments were by Japanese investors. A U.S. affiliate of a Japanese construction company acquired a hotel in Washington State and a Japanese railroad company acquired a hotel in Hawaii. Outlays in the motion picture industry were also sizable. The largest investments were by British investors in the motion picture industry, who acquired two studios-one in Texas and one in California.

Outlays in real estate were 2.8 billion, down from $4.8 billion in 1987. The outlays were for many small investments rather than for a few large ones. Of the five largest investments, four were by Japanese investors. The fifth was the acquisition of an office building in Texas by an Australian investor. The Japanese investments are discussed in more detail in the next section of this article.

In finance (except banking), outlays were $0.6 billion, down from $1.6 billion in 1987. The largest investment was the acquisition of a Connecticut-based government securities dealer by a Japanese bank. Country

Outlays are classified by country of ultimate beneficial owner (UBO) in tables 4, 5A, and 5B. In 1988, as in past years, British UBO's were the largest investors. They accounted for $21.5 billion, or 33 percent, of total outlays. Of the 12 investments of $1 billion or more, 4 were by British UBO'S; these 4 accounted for 51 percent of total British outlays. The four investments were in four industries: In insurance (the
purchase of the California-based insurer by the U.S. affiliate of a British
tobacco, retail, and financial services concern), in publishing (the


purchase of the New York-based publisher by a British printing, publishing, and communications concern), in construction (the purchase of the Pennsylvania-based construction company by the U.S. affiliate of a British road builder), and in wholesale trade (the purchase of the Illinois-based food wholesaler by the U.S. affiliate of a British sugar refiner). All transactions were discussed in more detail in the previous section of this article.

Japanese UBO's were the second largest investors in 1988, with $14.2 billion in outlays. Like the British, the Japanese made 4 of the 12 investments of $1 billion or more; these investments accounted for 42 percent of their total outlays. Three of these investments, all mentioned earlier, were in manufacturing; they were the acquisition of the New York-based record company by the U.S. affiliate of a Japanese consumer electronics manufacturer, the acquisition of the Illinois-based manufacturer of computers and electrical products by the U.S. affiliate of a Japanese metal, petroleum refining, and petrochemical company, and the acquisition of the Ohio-based tire manufacturer by a Japanese tire company. The other investment-the acquisition of the Washington State hotel by a Japanese construction company, also mentioned earlier-was in services. Outlays in real estate were also sizable, at $1.4 billion, but these outlays reflected many small investments rather than one or two large ones. Two of the largest investments were by Japanese real estate developers; one purchased an office building in California and the other purchased land in Hawaii. Two other sizable outlays involved establishments of U.S. real estate companies-one in Hawaii and one in California. Japanese outlays in U.S. real estate have been strong for several years, reflecting, in addition to the factors mentioned earlier, the scarcity of purchasable land in Japan.

Canadian UBO's were the third largest investors, with outlays of $10.4 billion. Two of the twelve investments of $1 billion or more were by Canadian investors; these accounted for 77 percent of total Canadian outlays. Both acquisitions, the Ohio-based department store chain by a Canadian real estate developer and the Florida-based orange juice producer by a Canadian alcoholic beverage manufacturer, were mentioned earlier.

Australian UBO's were the fourth largest investors, with outlays of $4.2 billion. The outlays were mostly attributable to one investment of $1 billion or more-specifically the acquisition, mentioned earlier, of the Pennsylvania-based publisher by the U.S. affiliate of an Australian communications concern.

French and Swiss UBO's also made sizable outlays-$3.8 billion and $2.0
billion, respectively. Outlays by French UBO's were mostly in primary and
fabricated metals and in


other manufacturing.' The outlays in primary and fabricated metals were largely attributable to one investment of $1 billion or more-specifically the previously mentioned acquisition of the Illinois metal can manufacturer by the French Government-owned packaging company. The outlays in other manufacturing" reflected the acquisition of a Connecticut-based encyclopedia publisher and a New York-based magazine publisher by a large French publishing concern. Outlays by Swiss UBO's were largest in "other manufacturing,' reflecting the acquisition of a Texas-based medical equipment manufacturer by a Swiss manufacturer of similar products. Other large outlays were in chemicals-for the acquisition of a pharmaceutical company by a Swiss chemicals manufacturer-and in services-partly for the acquisition of a New York-based computer services coneern by a Swiss investor.

Selected Operating Data

Total assets of the U.S. businesses acquired or established in 1988 were $126.8 billion, down slightly from $131.1 billion in 1987 (tables 6A and 6B). The decrease largely reflected an unusually large 1987 increase in assets resulting from two investments in U.S. securities firms.

U.S. businesses acquired in 1988 had assets of $116.7 billion; almost one- third of the assets were in manufacturing. Three acquisitions-the Ohio-based manufacturer of metal cans by a French packaging company and the two magazine publishers, one by a British and one by an Australian communications company-accounted for almost one-half of the total. Assets were second largest in "other industries' and third largest in insurance. In "other industries," the acquisition of a Pennsylvania-based construction company by the U.S. affiliate of a British road builder accounted for almost one-fourth of the assets acquired. In insurance, the acquisition of a Connecticut-based fire insurance company by an insurance company in Luxembourg and the acquisition of the California-based automobile and homeowner insurer by a British tobacco company accounted for most of the assets acquired.

Acquired businesses employed 643,106 workers. The acquired company with the largest number of employees was the department store chain that was purchased by a Canadian retailer and developer. Acquired businesses owned nearly 4 million acres of land. The largest acreage obtained in a single transaction that accounted for most of the total was by a Canadian real estate concern that acquired a stake in an Illinois-based railroad company.

U.S. businesses established in 1988 had assets of $10.1 billion, employed 33,871 workers, and owned 354,130 acres of U.S. land. Most of the acreage was owned by businesses in real estate, agriculture, and forestry. (Tables)
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Author:Herr, Ellen M.
Publication:Survey of Current Business
Date:May 1, 1989
Words:3035
Previous Article:The business situation.
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