Last month Thomson Reuters and J.P. Morgan jointly published "The Era of Globalized M&A: Winds of Change." The research document points out that currently mergers & acquisition activity that is targeted at U.S.-based companies accounts for only 10% of global cross-border activity. As can be seen from Exhibit 3.3 included in the document, this compares to levels of 20% to 30% or more during 2005 through 2007.
The inbound activity level has not been this low since 1992, suggesting that when it returns it may show a sharp rate of increase.
At the same time, China appears to be positioned to increase its outbound foreign direct investment. The Reverse Mergers blog authored by noted New York attorney David Feldman recently reported that
The government has worked to encourage “ODI” (overseas direct investment) by Chinese folks. Often the level of ODI is compared to “FDI” (foreign direct investment), which is also encouraged. They expect ODI to reach $180 billion this year while FDI will probably hit around $100 billion. Watch for more Chinese takeovers of companies throughout the world as the recession continues to lower values while China has huge foreign exchange reserves.
So if there is a rebound in U.S. inbound M&A activity, it is possible to estimate how much of the anticipated increase will come from China?
Bloomberg News reported last week however that China’s direct investment abroad fell substantially in the first half of this year. According to Chen Jian, Vice Chairman of China's Ministry of Commerce, non-financial overseas direct investment was $3.7 billion in the first quarter of 2009, a small fraction of the $170 billion invested outbound up to 2009. From that perspective, the U.S. appears to be unlikely to receive much direct investment from China. But the answer is simply not that straightforward.
A policy brief published last month by Daniel H. Rosen and Thilo Haneman of the Peterson Institute for International Economics, entitled "China's Changing Foreign Direct Investment Profile," provides a remarkably comprehensive and insightful view of China's programs and policies underlying outbound foreign direct investment (OFDI) . The Peterson Institute's brief describes the changing trajectory and nature of China’s OFDI toward those investments that will rebalance its economy and capture a larger share of the value chain in the manufacture and sale of its goods. It then offers six principal conclusions:
- readjustment of China’s growth model, more than political considerations, is driving the changes in the motives and targets of China’s OFDI
- currently, investment review by developed nations focuses on national security issues, and away from economic security issues; the exceptional degree of Chinese governmental involvement in China’s corporate and economic sectors will test the direction of investment reviews
- because China’s business are globalizing after OECD-country businesses have become globalized, it is in China’s interest to sustain open cross-border investment
- China’s need to accelerate its global investment presence is important for reasons beyond those narrowly related to foreign direct investment, including restoring global growth, alleviating poverty, rebalancing global growth patterns and mitigating climate change
- better statistical clarity is a prime requisite for China to maximize the benefits of OFDI
- in growing its OFDI, China will require assistance and cooperation from businesses, individuals and other governments
The brief does not single out the U.S. as being a more or less likely destination for China’s OFDI. Given the ability of U.S.-based business to enable China to achieve its OFDI goals, the inflow to our shares seems almost inevitable. There are no guarantees, however. The report itself points out:
The global financial crisis rekindled expectations that China would be buying, but lost value in the US securities and other poorly performing investment in a US financial firm . . . again turned the tide, prompting statements from Beijing that investment in distressed sectors abroad would be off limit. At present it again seems that political wind is blowing outward, carrying delegations to “bottom fish” the United States and Europe. Yet the callousness with which Beijing has blocked a number of inward investments in the past raises questions about its seriousness toward cross-border investments both ways.
In a subsequent post, we will summarize those findings of the Peterson Institute brief that relate to national security reviews of inbound investment, inlcuding CFIUS.
