The new bonanza: The business of buying and selling of firms
Guyana and the wider world
This week, Dr Clive Thomas looks at the effect of globalisation on mergers and acquisitions. Last week I argued that, ultimately, economic policies in support of globalisation are designed to construct an economic universe favourable to the expansion of trans-national corporations (TNCs). A rich understanding of how these firms operate is therefore essential, if we are to make intelligent choices about how countries like Guyana should proceed to secure their own development. It would be naïve, and indeed highly irresponsible of us, to assume that the strategic interests of the global TNCs would coincide with ours. They rarely, if ever do. We would be therefore, failing in our duty to present and future generations of Guyanese, if we do not act intelligently and prudently now--based on the best information and advice at our command. M&As and greenfield investments The trend of TNCs acquiring other firms, including other TNCs, at a tremendous rate (estimated by the United Nations to be in excess of 42% per annum) is perhaps the most remarkable economic phenomenon of our times. Mergers and acquisitions (M&As) constitute one of the two principal ways in which foreign direct investment (FDI) is undertaken. The other way is greenfield investments, where, as the name suggests, new facilities and new productive capacity are installed as part of the investment. Sometimes there are references to "brownfield" investments, which combine these two ways. M&As accounted for about 80% of all FDI flows last year. The vast majority of these M&As were acquisitions. Indeed mergers account for only about three percent of the total, and analysts feel that many of these mergers are disguised acquisitions. In general therefore, M&As refer to acquisitions. Why do I make this strong claim about the importance of the recent surge in M&As? The reason is that M&As are almost entirely acquisitions. In effect, a new global market of enormous size has been created alongside those already in place for buying and selling goods, services, and the productive factors. That market is one in which the firms that bring together the productive factors into a production system, in order to produce goods and services, are themselves bought and sold. Types of acquisitions When collecting statistics on M&As the United Nations treats as a cross-border acquisition, the purchase of ten percent and up of the equity of a firm by that of another firm located in a different country. Such acquisitions therefore range from 10 percent to 100% buy-out. Full acquisitions are 100% buy-outs. These accounted for about two-thirds of all acquisitions last year. Minority acquisitions range from ten percent to 49%. These accounted for about one-sixth of all acquisitions last year. The remaining one-sixth are acquisitions greater than 50% but less than 100%. Acquisitions can be either private or state-owned firms. In the latter case, we usually refer to these as overseas divestment and privatisation deals. M&As can be either friendly, hostile, or as a result of a "fire sale". Friendly M&As occur when the Board of Directors of the acquired or merged firm agree to the deal, and recommend it to shareholders. M&As are hostile takeovers, when the Board of Directors does not recommend the deal, and the firm is nevertheless bought out. Despite the publicity attached to hostile takeovers, these form only a very small minority of all M&As. The recent United Nations report show these to be less than five percent of the total value of all M&As. In terms of number, only ten of the 6,200 mergers in 1999 were hostile. "Fire sales" need no introduction. We are accustomed to these in Guyana. Fire sales are when firms are sold cheaply, at "bargain-basement" prices that are well below their assets value. This usually follows when there is a desperate effort to get rid of the firm at all costs. The reasons for this type of sale are many. They vary from government's effort to build an image as being favourable to foreign investment (as I think was the case with the NBIC deal) to a situation where a government enterprise is in so much trouble that the government wants to rid itself of the enterprise, at whatever cost. A case in point might well turn out to be the current bauxite industry. Patterns By definition cross-border M&As result in a change in the control of the merged or acquired firms. Local assets and operations are transferred overseas to the entity leading the M&As. Data on the patterns of these M&As are revealing. Thus about 90% of all cross-border M&As take place among the already developed economies, with only ten percent occurring in the developing countries. This means that the bulk of FDI flows also occur among the already developed economies. M&As involving developing countries have only picked up momentum over the past five to six years. As one would have guessed, this has been brought about mainly through state divestment and privatisation deals. Britain is surprisingly the leading country making foreign acquisitions. It accounted for more than one-quarter (US$200 billion) of the total value of all cross border acquisitions (US$720 billion) in 1999. The USA is the leading country in which purchases are made or firms are acquired. It accounted for US$276 billion, or one-third of the total value. Mega Deals M&As are categorized as mega-deals when they involve assets valued at US$1 billion or more. In the past year there were 109 of these, out of the total 6,200 M&As recorded by the United Nations. These accounted for more than two-thirds the value of all M&As. Up to early this year, the largest M&A was the purchase by Vodaphone Air Touch (UK) of Mannesmann of Germany for US$200 billion. This sum was the staggering equivalent of one firm acquiring six percent of the combined GDP of Germany and the United Kingdom! Conclusion By any standards the emergence of this rapidly growing market for the buying and selling of firms, is a staggering outcome of globalisation. This, however, is the product of a complex set of circumstances, which we need to explore. Included among these circumstances are the roles of technology, financial development, and policy changes in favouring M&As. Behind all of this, however, is the perennial drive of firms in a market economy to grow and to seek to dominate the market, this being their best insurance for survival. This is the reality of the competitive environment that capitalism creates. Such a process of buying and selling firms is not guided by the best interests of any nation or group, or indeed of the so-called global community. The primary interests are the commercial interests of those involved in the transactions. Commercial concerns therefore dominate above all else. This feature leads to lopsided development, since social, cultural, and political factors do not enter into the process in an explicit way. Unfortunately, without these we are unable to ensure that the objectives of equity, balance, and social justice, are considered alongside private commercial gain. Next week we take these issues further. We begin by trying to understand the reasons why firms seek to expand through M&As. Then, if space permits, we start our examination of the economic impacts of this pattern of expansion.
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