For
years, the titans of finance have held out the promise that they could
export their business model overseas and mint billions in the process.
Yet, there are increasing signs that global deal-making was always a
myth.
If you’ve been anywhere near a Wall Street conference in the
last five years, you know the drill. Deal makers bemoan the United
States as a mature and overregulated economy. They talk about heading
abroad, as emerging market economies leave us far behind. To listen to
them, one might think the rest of the world was a paradise out of “Atlas
Shrugged,” where capital flows and where
private equity, investment banks and other investors can freely seek opportunities.
So
what country is No. 1 in initial public offerings so far this year?
Yes, it is the United States, according to Renaissance Capital, with 75
I.P.O.’s raising $39 billion in total. Compare this activity with China,
where 41 I.P.O.’s raised just $8.1 billion.
M&AS
And in mergers and acquisitions? Again, it is the United States,
with 53 percent of the worldwide deal volume, up from 51 percent from
last year, according to Dealogic. For investment banks, this means that
the United States has a 46 percent share of the $63 billion in worldwide
investment banking revenue, up from 34.6 percent in 2009.
With
the slowdown in once-hot emerging markets, the tide is going out, baring
all of the problems and issues associated with global deal-making.
China
is a prime example. Huge amounts of foreign and state investment
produced an economic miracle. And in that time, wealth was there to be
had.
But let’s be clear about where that wealth came from. In the
United States, deal makers make money primarily by buying
underperforming assets, adding some financial wizardry and riding any
improvements in the stock market. Sometimes, they get lucky by making a
quick profit, but often private equity works to squeeze out
inefficiencies and make operating improvements in companies and then
takes them public a few years later.
China's situation
In China, what increasingly
appears to have been a stock market and asset bubble spurred by hundreds
of billions in direct investment has created some spectacular early
profits for deal makers. The private equity firm
Carlyle Group,
for example, has made an estimated $4.4 billion on an investment in
China Pacific Insurance, which it took public on the Hong Kong Stock
Exchange.
But now, with the Chinese I.P.O. market at a virtual
standstill and the Shanghai market down more than 30 percent from its
high last year, that avenue to riches is over. People are starting to
say that investment in China resembles a “No Exit” sign.
Deal
makers are left with a back-to-basics approach that looks to make money
from companies through economic growth or improving their performance.
Yet most of these investments are made with state actors and minority
positions, meaning that there may be little opportunity to actually do
anything more than sit and wait and hope. And you know what they say
about hope as a strategy.
It appears that deal makers are starting
to realize the problem. Foreign direct investment in China was down
3.67 percent from last year to $9.6 billion, and it is likely to remain
on a downward trend.
And China has been among the friendliest
places for deal makers. Other emerging markets have been less
accommodating. Take India, which has been criticized for excessive
regulation, high taxes and ownership prohibitions.
David Bonderman,
the head of the private equity giant TPG Capital, recently said that
“we stay away from places that have impossible governments and
impossible tax regimes, which means sayonara to India.”
Foreign issues
The comment
about India highlights another problem with foreign deal-making: it’s
foreign. Sometimes, the political winds change and local governments
that initially welcomed investment change their minds.
South Korea, for
example, invited foreign capital to invest in its battered financial
sector after the Asian currency crisis. But when Lone Star Investments
was about to reap billions in profits on an investment in Korea Exchange
Bank, a legal battle almost a decade long erupted as Korean government
officials accused the fund of vulture investing.
And the political
problems are sometimes not directed at foreign investors. South Africa,
for example, is undergoing the kind of political turmoil that can stop
all foreign investment in its tracks over treatment of its workers and
continuing income inequality. Things are not much better in the more
mature economies.
Economic doldrums
Europe is in the economic doldrums, and its
governments are increasingly protectionist of both jobs and industry.
France, for example, recently threatened to nationalize a factory owned
by
ArcelorMittal,
which sought to shut down two furnaces.
The national minister said the
company was “not welcome.” It’s hard to see a deal maker profiting from
buying an inefficient enterprise that it can’t clean up without risking
national censure.
Buying at a low is the lifeblood of any
investment strategy — but this assumes that there will be an uptick, and
on the Continent, that is uncertain given the state of Greece and the
other indebted economies in Southern Europe.
This is all a far cry
from the oratory vision-making at conferences. Now that the global gold
rush has ended, the belief that the American way of doing deals is
portable is being upended.
Fragmented world
We are left with a fragmented world
where capital moves not so freely, the problems of politics and
regulation are more prominent and investing in emerging markets becomes
what it always has been: the province of more specialized investors who
are in tune with the political and regulatory requirements. Regardless,
the easy riches that many thought these countries would bring are now
far out of sight.
And the winner in all of this is likely to be
the much-maligned United States, where the economic conditions and
regulatory environment first gave birth to these deal makers.
This
is not to say that there will still not be global deal-making or that
American multinationals will not continue to expand abroad. Of course,
there will still be profits in deals overseas. But the vision that
deal-making will instantly and seamlessly go global is increasingly
exposed as one that was more a fairy tale than reality.- IHT/NYT
