America for Sale

Foreign companies emboldened by a weak dollar are on the prowl for undervalued U.S. assets, and more deals are likely in the pipeline

by Ben Steverman

Business Week

July 25, 2008

American companies are on sale. Foreign buyers are circling, taking advantage of a weak U.S. dollar and a depressed stock market to snap up U.S. companies at discounted prices.

Recent big deals include the July 13 acquisition of Anheuser-Busch (BUD), the owner of Budweiser and other iconic American beer brands, by Belgian brewer InBev (INBVF) for $52 billion. On July 21, Swiss biotech company Roche Holdings (RHHVF) said it will swallow the rest of San Francisco-based Genentech (DNA) that it doesn't already own for $43.7 billion. And on July 23, Japanese insurer Tokio Marine Holdings (TKOMF.PK) announced plans to buy U.S. insurance company Philadelphia Consolidated Holding (PHLY) for $4.39 billion.

The headlines are enough to give some Americans the queasy feeling their country is being sold out from under them. "It's the End of an Empire Sale and everything must go!" comedian Lewis Black said on Comedy Central's The Daily Show. "We're so hard up for cash we're dismantling America and selling it for scrap." He cited the Anheuser sale as well as this month's $800 million purchase by the Abu Dhabi Investment Council of a 90% stake in New York's Chrysler Building.

Feeding Frenzy

In the past five years, 2,331 U.S. firms with a total value of $772.3 billion were purchased by foreign buyers, according to data provider Capital IQ (like BusinessWeek, Capital IQ is a unit of The McGraw-Hill Companies (MHP)). In 2007, 614 U.S. firms, valued at $294.4 billion, were acquired by foreign entities, up from 226 firms valued at $49.6 billion in 2003.

Foreign buying in 2008 has slowed slightly, reflecting the global slowdown in merger-and-acquisition activity in recent months. However, foreign dealmaking could still match 2006's healthy pace: At mid-July, 266 deals valued at $121 billion had been announced, compared to 541 deals, totaling $155.1 billion, in all of 2006.

Bankers and M&A specialists interviewed by BusinessWeek said there were several reasons foreign buying of U.S. firms can be expected to continue and even accelerate. One factor is the weak U.S. dollar. The euro is near record highs against the dollar, up 13.6% in the past year. The dollar index, measuring the U.S. dollar against a basket of foreign currencies, is down 9% from a year ago.

There's disagreement about how much a weak dollar actually entices buyers. A foreign company might pay less in its native currency, but it's also getting less, because a U.S. firm's cash flow and profits are also denominated in American currency, says H. Hiter Harris III, co-founder of boutique investment banking firm Harris Williams. However, that logic doesn't apply if you're buying a hard asset, Harris says. Just as foreign tourists take advantage of the weak dollar to buy clothes, jewelry, and other items at steep discounts, foreign firms can buy assets such as land, buildings, and especially brands—like Budweiser, for example.

An Opportune Moment

While the weak dollar may not be a decisive factor, it can speed up deals. Buyers are thinking, "if we were going to make a move in the next 10 years, this would be as good a time as any," says Herald Ritch, president and co-CEO of investment bank Sagent Advisors.

Another factor may be the availability of credit. While the financial crisis is a global phenomenon, foreign buyers "seem to have a little better access to financing than we do in the U.S.," says John LaRocca, a partner at Dechert who specializes in M&A.

However, even if the price is right and credit is available to buyers, bankers say a potential acquisition must make strategic sense. For example, by combining with U.S. companies, foreign consumer companies often are seeking to make global distribution systems more efficient. "You can get more products through the same distribution channels," says Paul Smith of FTI Consulting (FCN).

"The U.S. is still the biggest and richest market in the world," says Ritch. "If you have global aspirations, you need to be in the U.S."

Buyer Profiles

Where are the all the buyers coming from? Companies in Canada and Europe's developed countries have consistently been the most aggressive buyers of U.S. companies and initiated 69% of deals last year, according to Capital IQ.

Asian companies have stepped up their buying, particularly those from emerging economies such as India and China. Emerging Asian companies launched 23 buyouts so far in 2008 and 62 in 2007, nearly double 2006's total and more than four times 2005's. But emerging Asian companies, which tend to focus more on growing within their own borders, make up a small portion of the buyers.

Foreign buying of U.S. firms could accelerate if worries ease about the U.S.'s credit troubles and weak economy. "They want to look before they leap," Ritch says.

U.S. financial companies, which have had their market values slashed in the last year, are among the industries that could eventually attract interest from abroad, bankers say. But buyers don't want to own these kind of distressed businesses just yet, Harris says, because they aren't sure when those industries will hit bottom.

Prospective buyers are sticking to safer, more secure parts of the U.S. economy. "We see a lot of action [in] high-quality growth companies," Harris says, who notes that energy businesses are favorite buyout targets now.

Political Angles

One thing that's not clear is how much politics will affect the pace of U.S. buyouts. In 2006, DP World, owned by the United Arab Emirates, was blocked in its efforts to buy the management of several U.S. ports, with critics citing national security concerns. But between then and the announcement of InBev's bid for Anheuser, there have been few concerns raised about foreign buyouts of U.S. companies. Although there was an emotional reaction to seeing a major U.S. brand such as Budweiser end up in foreign hands, the Anheuser buyout is expected to be approved.

U.S. shareholders usually lift a glass to acquisition proposals—wherever they come from—because they boost stock prices. Also, employees and their communities sometimes prefer foreign investors, LaRocca says. Overseas buyers often have a longer-term view, which makes them more likely to invest in building the business, he says.

The 2008 Presidential election and a new Administration could change the climate. Until then, like the cheap U.S. dollar, foreign buyouts will be another reminder that U.S. economic growth is falling behind much of the rest of the world.

Here's a look at the largest foreign acquisitions of U.S. firms in the last five years, courtesy of Capital IQ.

Steverman is a reporter for BusinessWeek's Investing channel.

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