The big foreign-money purchases of stakes in Citigroup, Merrill Lynch, and Morgan Stanley are merely a hint of what's ahead in 2008. Foreign buyers, such as sovereign wealth funds from countries like Kuwait and Singapore, will continue to make headlines by grabbing major U.S. assets this year, and the trend is much broader than investments in Wall Street firms that need a capital infusion.
Budweiser bought out by a Belgian company
What's important to understand is why this is happening - the reasons go beyond what most people realize - and why it may be even more worrisome than it seems.
AT THE DEPTHS of the 1973-74 bear market — the worst of the post-war period — when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing."
Buffett's words may have been indelicate — Forbes ended up changing the world "whorehouse" to "harem" when the interview ran — but the CEO of Berkshire Hathaway (BRKA) was on the mark because that era produced some of the best bargains of the past 50 years.
Such deals were hot even before the bank bailouts. Foreign buyers set a record last year by purchasing $414 billion of U.S. assets - even more than they bought in the wonder year of 2000.
Last May, a Saudi Arabian conglomerate bought a Massachusetts plastics maker. In November, a French company established a new factory in Adrian, Michigan, adding 189 automotive jobs to an area accustomed to layoffs. In December, a British company bought a New Jersey maker of cough syrup
The usual explanation is that the dollar was cheap, which was certainly an important factor. But more had to be going on. Many of the biggest deals were done by Asian or Middle Eastern buyers who already hold much of their wealth in dollars. Those investors didn't get a discount because of the dollar's declining value. In addition, U.S. stocks were hitting record highs through much of last year, so it's hard to say that American businesses in general were bargains. Why, then, were foreign buyers so busy?
The overlooked part of the answer goes back a decade to when Americans started buying a whole lot more from other countries than they were buying from us. We'd been running a trade deficit since the 1970s, but it took off in the late 1990s and has been galloping ever since. All those dollars we send into the world come back to us - some as purchases of our goods and services, and the rest, equal to the trade deficit, as investments.
Foreign giants like Toyota Motor and Sony have been sinking capital into American plants. Investment in the American subsidiaries of foreign companies grew to $43.3 billion last year from $39.2 billion the previous year, according to the research and consulting firm OCO Monitor.
This is an interesting topic. As of lately, American businesses are being bought out left and right by foreign multinationals. Now, this certainly would not look favourable to those who put a lot of emphasis on national pride and "Made in the USA" because it gives the impression of "first-rate" quality. At the same time, foreign investment may actually turn out to be a blessing in disguise.
One would think that with so many MBAs being churned out from American universities that the US would always remain top-dog in the world of business.
Sound recording industries
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Motion picture and sound recording industries
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Motion picture and video industries
Wineries and distilleries
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However, it is apparent that with so many failures of American businesses (notably in the financial services sector and major airlines) that, simply put, foreigners are beating us at our game (capitalism). Some of the reasons for this include American companies relying upon outdated and ineffective business models, resisting any real change to appeal to different consumer preferences (They TELL us what we "want" rather than listen.) and no longer remaining at the forefront of innovation. (The classic example being the auto industry, where GM & Ford are in a downward spiral while Toyota is ever-so-close to being #1.)
Of course, corporate greed also plays a role. Most shareholders have invested over the years (especially during the early years of the boomtime 1990s)
simply to cash in right after the company becomes very profitable. Now, with the downturn in the economy, many investors are selling out to the "nouve-rich" of foreign companies partly for the reasons stated above. The foreigners are willing to fork over more money, take bigger risks, and stick around for the long-haul.
OF course, there are also more American-owned companies that simply have (or possibly will) relocated overseas (predominately, to the 3rd world where tax & environmental laws are more favourable to them).