A Business article Tuesday misreported the results of a survey conducted by Mergers & Acquisitions magazine of foreign acquisitions of U.S. companies. The survey found that in the first nine months of 1989, 392 acquisitions worth $40 billion were completed, compared with 384 worth $36 billion in that period in 1990. (RP 1/29/91)
Foreign investors bought almost as many American companies in 1990 as they did in 1989, but often paid for them by borrowing in the United States rather than bringing new capital in from abroad, according to many economists who track investment patterns.
A quick pace of investment for 1990 is at odds with earlier appraisals that foreign acquisitions had slowed dramatically. And reliance on U.S. loans runs counter to one of the prime arguments used by proponents of foreign investment: that it injects new, badly needed capital into the economy.
"They're getting more ownership with less of their own money," said Nicholas Sargen, director of the bond market research department at Wall Street investment firm Salomon Brothers Inc. Investors, he noted, were tending to finance deals in the United States because swings in world interest rates have generally made it cheaper to raise money here than abroad.
In the 1980s, foreign investment came to play a pivotal role in U.S. prosperity, as the world shipped capital to this country in huge volumes. The trend became a sore point for some Americans, however, who feel that a short-sighted "fire sale" of national assets is underway.Last year saw a continuation of high-visibility deals, including the $7.5 billion purchase of Hollywood filmmaker MCA Inc. by Matsushita Electric Industrial Co. of Japan and British company Bass PLC's $2.2 billion acquisition of the Holiday Inn motel chain.
But there also were reports that the total number and value of the deals were waning, which seemed likely to take some of the steam out of investment as a political issue. It also seemed to make sense in view of world economic trends.
Many investors were focusing on Europe in anticipation of the fast-approaching target date for the fully developed European Community. The U.S. economy was slowing down, its takeover craze had ended and its trade deficit was declining, putting out fewer dollars to return as investment capital.
Problems in real estate and financial markets in Japan seemed to have cooled its companies' overseas interest.
The conclusion that deals were on the decline also was supported by quarterly reports that the Commerce Department issues on flows of money across U.S. borders. They showed a 60 percent decline in the first nine months -- to $20 billion -- in a line labeled "foreign direct investment." This is money that buys stakes of 10 percent or more in U.S. companies or sets up new ones, but it is just one part of total foreign investment, which also includes purchases of U.S. government securities and deposits in U.S. banks.
Now comes a reassessment, although by no means unanimous, of what those numbers mean, fueled by private tallies of foreign deals. A survey by Philadelphia-based Mergers & Acquisitions publication, for instance, found foreign purchases down only slightly in 1990: Preliminary numbers, said editor Martin Sikora, show 392 deals worth $40 billion in the first nine months of the year, compared with 384 worth $36 billion in that period in 1989.
"Foreign acquisition remained strong in 1990," said Sam Rosenblatt, senior economist at the Association for International Investment, which represents foreign companies with U.S. holdings.
Many analysts feel that the Commerce Department's quarterly figures may mask brisk activity due to some fine points of the statistician's art -- the fact that the foreign direct investment figure is itself the sum of three numbers: foreign cash that enters to buy equity in U.S. companies, money coming in as loans from foreign companies to their U.S. affiliates and earnings being reinvested by foreign-owned companies.
In 1989, the equity and loans components showed strong inflows, pumping up the overall figure, while reinvestment of earnings was negligible. In the first nine months of 1990, the equity inflow decreased a bit, while debt and earnings both showed large outflows. That is, as a group, foreign-owned companies in the United States were paying off debt to their parents abroad and they were sending out profits faster than they were making them.
The effect was to drive the over-all figure down dramatically. Some economists surmise that as a group foreign-owned companies here are borrowing more heavily on the U.S. market. That borrowed money can be used to pay off higher-rate, foreign loans taken in the past to finance acquisitions -- creating an outflow of debt -- or to pay for new acquisitions. These acquisitions, because they were financed locally, do not show up on the Commerce Department's quarterly figures. The borrowing could prove politically embarrassing for investors. If foreign companies are borrowing capital on the U.S. credit market to finance acquisitions, they could be viewed as competing with U.S. companies for the same pool of capital and possibly displacing them.
The figures on repatriation of earnings in addition is also not welcome news for the investment lobby. It has often argued that foreign companies do not necessarily take their profits home but reinvest them in the United States, creating more jobs and economic activity. The figures, however, show that for the group as a whole the reverse was true in the first three quarters of 1990.
Perhaps the best gauge of whether foreign purchases are up or down will come in May, when the Commerce Department issues a tally of foreign acquisitions, regardless of how they were financed. But even that count will not be perfect -- it will not, for instance, reflect sell-offs by foreign companies.
Debate over the numbers underlines the difficulties of tracking and quantifying foreign investment in a country whose government welcomes it but warns that enacting stronger disclosure requirements might scare it away and damage the economy.
Bush administration officials argue that the figures are adequate, but agreed last year to support a new law that lets the Census Bureau and Commerce Department share certain information that they already collect. However, pressure continues on Capitol Hill for tighter reporting. Said Norman Glickman, co-author of "The New Competitors," a study of foreign investment in the United States: "The data are so broad and aggregated that it's sometimes pretty difficult to get a firm picture."