Buying American

As Middle Eastern and Asian industrial powers supplant private equity as acquirers of U.S. companies, some targets gain advantage.

Dwarfing Private Equity

As powerful a force as private equity has been, wealthy sovereign funds have much larger war chests. Singapore’s Temasek Holdings and China’s state funds, for example, are worth between $1.5 trillion and $2.5 trillion, according to U.S. Treasury Department estimates. As they divert more reserves to higher-yielding assets, they could grow to as much as $17.5 trillion within a decade, according to Morgan Stanley.

Overseas investors often favor highly recognized American brand names, particularly in the financial, retail, real estate, and industrial sectors. Besides Doosan’s purchase of Bobcat, examples include government-arm Dubai World’s $5 billion investment in MGM Mirage, and its Nevada real estate joint venture City Center. Istithmar, another Dubai entity, bought luxury retailer Barneys New York Inc. in June for $942 million, topping Japan’s Fast Retailing. In September, Abu Dhabi’s Mubadala Development Co. paid $1.4 billion for a 7.5 percent stake in private-equity giant Carlyle Group (echoing China’s $3 billion investment in Blackstone Group last spring).

While the Carlyle stake was bought at a discount, such bargain hunting is rare among Gulf and Asian buyers. In fact, they often make topping bids for high-end assets. When Istithmar’s purchase of Barneys New York triggered a bidding war, for example, even the bankers were impressed by the price for the luxury-goods retailer. “Going in, I would not have expected this level of interest in retail,” says Michel Eck, chairman of Citigroup’s consumer/retail investment-banking division. (Citigroup provided financing for the debt and was an Istithmar adviser.)

What Buyers Want

Bankers, recognizing this new interest in retail, are talking to potential foreign corporate buyers and U.S. sellers about the possibilities. “They look for strong management teams and high-quality brands that have the potential to be capitalized on internationally,” says Eck. He adds, “There will be more activity coming out of the Middle East, given the pools of capital accumulated.”

Persian Gulf buyers aren’t the only ones paying premiums. Doosan’s bid for Ingersoll-Rand’s Bobcat unit was dramatically higher than the $3 billion some analysts expected.

The shift to Asian and Middle Eastern buyers is causing some concern among American politicians, of course. The Borse Dubai stake in Nasdaq is already being studied by Congress, led by Sen. Christopher Dodd, the Connecticut Democrat and Presidential candidate who also chairs the Senate Banking Committee. But while there may be concerns about specific deals, “it will take a long while for emerging markets to catch up with the United States,” says Bob Filek, a partner at the transaction services group at PricewaterhouseCoopers.

American sellers are not complaining. “This deal allowed both sides to accomplish a number of objectives,” says Nasdaq CFO Warren. “We were able to solidify our bid for the OMX, exit our LSE stake — at a nice gain, I might add — and build on our global reach. Borse Dubai was able to execute on global-exchange investment diversification as well as get access to our brand to build their market at home.”

Avital Louria Hahn is a senior editor at CFO.


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