America for Sale
The dollar is taking a pounding. It is sharply down against the euro, pound, Swiss franc, and the yuan—almost every major currency. The dollar is also down against gold and silver, as well as against wheat, corn, cotton and many other commodities.
Nobody seems to want dollars anymore. Consequently, more dollars are needed to convince people to part with their goods. About the only thing in America that is not costing more in dollar terms these days are homes, which are now rapidly falling in price across the nation (though home prices are still much higher than they were five years ago).
Why such an abundance of anti-dollar sentiment? According to Peter Schiff, president of Euro Pacific Capital Inc., it is because the dollar is “a basket case.” He warns that America is “going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet.”
Part of that price is the flurry of foreign takeovers that America is experiencing. But who can blame the foreigners? America is home to some of the most technologically advanced and profitable companies in the world. And with the dollar so cheap, many of them are practically a steal.
In July, theTrumpet.com noted that during 2006, foreigners spent $147.8 billion snapping up U.S. businesses—up 77 percent from 2005. At that time, the U.S. Department of Commerce reported that Europeans led the way, spending an astounding $109.9 billion—almost double what they did in 2005.
Nationally, Germany, which spent $22.7 billion, was the largest single buyer of U.S. corporations. Middle Eastern investors, due largely to higher oil profits, spent $12.4 billion purchasing U.S. businesses, more than twice 2005 levels. In Asia, Japanese corporations spent $8.7 billion taking over U.S. rivals.
Now, recent data indicates that foreign entities have spent even more money purchasing U.S. corporations in 2007. In fact, as of October, a whopping $257.4 billion has been spent snapping up U.S. assets. That is more than during any full year since the dot.com boom in 2000, and despite the fact that global credit markets drastically tightened in July.
“We could be looking at the world’s largest tag sale if we continue to see declines in the dollar,” said Donald Klepper-Smith, chief economist at DataCore Partners.
As the U.S. dollar falls, U.S.-based corporations become inexpensive compared to their foreign counterparts. Those holding non-dollar currencies have seen their U.S. purchasing power increase drastically as the dollar has fallen.
“Put simply, the U.S. is on sale,” notes MarketWatch.
The latest large deal aided by a weak U.S. dollar was Canada’s Toronto-Dominion Bank’s $8.5 billion purchase of New Jersey-headquartered Commerce Bancorp, announced on October 2.
In June, Spanish power company Iberdrola bought Energy East, a Maine-based utility supplier, for $4.5 billion in cash. One of Energy East’s subsidiaries provides 80 percent of the power for the state of Maine.
In April, Italian energy company Eni bought a chunk of Dominion Resources natural gas fields for $4.8 billion. During that same month, another high-profile takeover occurred when the German-based Deutsche Boerse announced it would assume control over the New York-based International Securities Exchange Holdings Inc. for $2.8 billion. The New York-based company is one of the largest domestic options exchanges in the United States.
Though Europeans were the dominant foreign investors in the U.S. last year, America will probably experience increased takeovers from China and the Middle East. Chinese and Middle Eastern interests are less affected by the banking credit crunch currently plaguing America and Europe. These countries also hold trillions’ worth of dollar assets, such as U.S. government treasuries and bonds. As the dollar has sunk in value, the pressure on these nations to diversify their holdings has increased in proportion. Today we see these nations dumping their dollars in favor of U.S. corporate assets.
In May, China made what was probably the first of many future U.S. investments when it purchased a $3 billion stake in the private-equity firm Blackstone Group. China holds approximately $1.2 trillion in foreign currency reserves, most of which are U.S. dollars. Word from top Chinese officials indicates further dollar spending is on the way as the nation seeks to diversify its holdings.
More recently, the United Arab Emirates concluded a transaction that landed them a 20 percent stake in the Nasdaq as well as a 28 percent stake in the London Stock Exchange. In a separate transaction, the Abu Dhabi government just purchased a $1.35 billion stake in U.S.-based Carlyle Group.
Some economists are quick to suggest that foreign buyouts of American corporations are a good sign, and just mean the U.S. is an attractive place to invest. But just because foreigners benefit from investing in America doesn’t mean that all foreign investment is favorable for the average American citizen.
It is quite natural that foreign entities want to purchase American companies, says Alan Tonelson, a research fellow at the trade group U.S. Business and Industry Council. “They want leading-edge technology, and the United States is still the technology leader. But when they buy these companies, they’re acquiring control over the most dynamic pieces of the American economy, and they’re acquiring control over America’s future.”
Once U.S. technology is acquired, the incentive to maintain American operations often diminishes, especially in cases where inexpensive off-shore labor can be used. For example, the French telecommunications equipment maker Alcatel bought its U.S. rival Lucent Technologies in 2006. Last month it announced it would cut thousands of jobs. Similarly, the outsourcing provider Caritor, which has its head offices in California but most of its employees in India, said that it would be cutting more than a quarter of the U.S.-based staff from the Boston head office of the technology services company Keane it purchased in June.
Another often unreported downside to foreign ownership is that once the domestic company is sold, its future dividends and profit streams are more likely to then flow outward from America to the home nation. After all, the whole job of these foreign corporations is to invest overseas and repatriate the profits for the benefit of their own shareholders.
With the dollar at lows not seen for more than a generation, the U.S.-asset fire sale will likely continue.
To give an idea of how big the wave of foreign takeovers could become, according to the Daily Reckoning China’s “$1 trillion on hand … is enough to buy a controlling interest in all 30 of the Dow Jones Industrials” (May 29). That includes Boeing, ExxonMobil, Citigroup, General Electric, Microsoft, JP Morgan Chase, Wal-Mart, General Motors, plus 22 more of America’s biggest and best companies.
America may not be fretting the wave of foreign takeovers now, while economic conditions are still comparatively good. In times of peace and prosperity, foreign control of domestic industries and infrastructure may not be an immediate threat. But during major economic recessions—or, worse, times of geopolitical upheaval and war—the loss of ownership and full control of national industries will really be felt. America will yet rue the day that it embraced an economic policy that included giving up its corporate birthright.
