Shift to "Buy" Over "Build," Reports OCO Global

Posted on August 20, 2009 by Bill Newman

Intuitively, FDI into the U.S. should be increasing. An increasing chorus of economists is declaring that the recession at or near to an end. Asset prices remain low. IPO’s in the stock markets have begun to stir, raising hopes for exits from investments and for capital to recast balance sheets. The anecdotal evidence is that FDI continues to stream toward other developed economies such as Australia, and transitional economies, such as China and Brazil. Is the U.S. likely or not likely to be an early beneficiary of FDI flows as the world economy recovers?

OCO Global develops strategies for economic development organizations and investment promotion agencies worldwide. Led by its CEO, Mark O’Connell, earlier this year OCO’s editorial team published “A New Investment Paradigm,” a forecast of near-term market directions for FDI.

The findings of OCO’s report include:

  • a prediction for a bounce in M&A from companies that normally would have expanded through greenfield investments
  • firms from emerging markets have entered the world FDI market in force and are formidable competitors; these firms will use M&A as the pathway for investing in host economies; for example, Indian FDI into the U.S. could triple over the five years ending 2014
  • OFDI from China nearly doubled and the trend is likely to continue, following the government’s promotion of a “go global” policy, particularly in service industries
  • the vast majority of recorded OFDI from China has been from large state-owned enterprises (SOE’s); future OFDC is more likely to originate within its private sectors
  • less than 5% of China’s OFDI has been directed at North America; there are at least two rationales for this relatively small percentage:
    • a lack of readiness by Chinese businesses to compete with large U.S. companies on their home turf; and
    • a fear of U.S. protectionism hiding behind a regulatory screen
  • in China, the availability of foreign exchange reserves combined with credit availability makes OFDI affordable and inviting, particularly if targets with existing market share and recognized brands are cheap

One could connect the dots among these factors and conclude:

  • the greater availability of credit to offshore businesses -- plus a strategic need to bolt on the right target -- gives inbound acquirers significant advantage
  • the “buy versus build” scale may have tipped to the “buy” side for multi-national enterprises and investors
  • low visibility of revenue growth for U.S. based companies may hold down valuation multiples, making acquisitions more affordable
  • the need for capital, especially capital that increases employment and capital expenditures, may make inbound acquisitions more palatable -- even desirable -- in parts of the U.S.
  • as more foreign buyer become truly privately-owned, and fewer are SOE’s, U.S. businesses and their constituencies (i.e., labor, localities, vendors) may become less averse to inbound deals

 

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