Fund Globally, Think Locally

M. C. Andrews   , Tucker Eskew    Earthlights

Foreign investment in the U.S. is drawing greater scrutiny, even as the American economy is buffeted by recessionary pressures. Too much misplaced scrutiny could lead to more recession, yet changes in federal law and regulations are about to dramatically increase the political pressure on certain kinds of international capital infusions here at home.

Historically, foreign investments received additional examination only when they potentially impacted our national security. Today, we are concerned by a perceived growing hostility to globalization in America leading to increased scrutiny on foreign investment, particularly those involving foreign governments.

The Defense Production Act and its amended section 721, known as the Exon-Florio Amendment, give the President authority to block mergers, acquisitions, or takeovers of U.S. firms where the transaction would pose a threat to National Security. President Ford first placed responsibility for reviewing such transactions with the Committee on Foreign Investment in the United States (CFIUS), a process all his successors have followed.

Last July, the Foreign Investment and National Security Act (FINSA) was signed into law. This act expands the federal definition of national security to include homeland security, critical infrastructure, and other critical systems. The law also calls for review of any foreign government-controlled transactions. What's more, Members of Congress have demanded earlier and more explicit notification of these sensitive investigations. Therefore, we believe many more transactions will be scrutinized, and the debate may often be conducted in the public eye.

Changes in the rules governing the CFIUS process are expected this month. Further, in an election year fraught with bad-mouthing about foreign investment, we expect to see an increase in political pressure on these transactions. Foreign sources of capital - along with their investment advisors, accountants, and lawyers - must prepare for these changes.

"Foreign Wealth Funds Defend U.S. Investments"
Washington Post, March 27, 2008

With experience at Fortune 500 corporations and uppermost levels of our government and its foreign-focused offices, we believe international capital flowing into and out of America's economy is positive for Americans and the investors. We've devoted ourselves to closely studying public opinion and regulations on this issue, and what follows are a set of strategic observations and a few of the recommendations we've developed for addressing the looming challenge.

From blue collar pension funds to billion dollar hedge funds, global investing is a cornerstone of our economy. Many Americans owe their nest eggs to indirect investment between countries' economies, and the huge numbers indicate how important this capital is. Foreign investment in the United States topped $1.8 trillion in 2006, and in the same year, U.S. acquisition of financial assets abroad topped $1 trillion, according to a report from the Commerce Department's Bureau of Economic Analysis. Direct investment was $184 billion, with the balance going to stocks and bonds. Foreign trade accounted for 27 percent of GDP in 2005 as compared to 11 percent in 1970, and 12 million U. S. jobs are linked to foreign exports, according to a State Department report.

Despite recent turbulence in the financial markets and a softening growth, the United States offers an attractive investment climate because of its efficient financial system and its overall stability. That is why sovereign wealth funds, foreign corporations, and high net-worth individuals flock to the U.S. [Note: The high profile sovereign wealth funds are worthy of greater comment than our space here affords, so this Snapshot discusses CFIUS-related and non-CFIUS transactions irrespective of foreign funding source.]

Foreign sources of capital - along with their investment advisors,
accountants, and lawyers - need to prepare for these changes.

As we invest in foreign economies, it is only appropriate that our laws allow non-Americans to invest in our own economy. After all, these investments are good for businesses from New Mexico to New York, California to Connecticut, and Alaska to Alabama. Recently, foreign investment has cushioned the blow of the credit crisis related to our housing market problems.

Less tangibly but just as importantly, international investing brings people, job-creators and governments closer together. It raises standards of living, makes a great vehicle for cultural exchange, and creates common interests.

Unfortunately, we're witnessing a cultural disconnect. A vocal minority of Americans have a negative emotional response to foreign investment, as shown in two recent opinion studies. (See the Pew/Council on Foreign Relations study and a Wall Street Journal/NBC News poll). How dare foreigners invest in our economy?they ask. They are taking our jobs, and what is made in America should stay in America. These protectionist views have a currency that historically ebbs and flows with the fortunes of our economy. Recent opposition, however, developed even as our economy grew, fueled by a perception that many people were "falling behind" despite economic data that suggests otherwise. Recent presidents, including George W. Bush, have encouraged foreign investment in America, and worked with our allies to insure free flow of capital around the world.

The greatest challenge for international investors in the U.S., including corporations, governments, and sovereign wealth funds, is understanding these perspectives and taking action to bridge the divide.

Barriers to Entry
Barriers to entry - financial, technical, material or other obstacles - exist in every market.

High prices are often one such barrier for any investor in the U.S, yet excess petro dollars and a weak U.S. dollar create an attractive climate for foreign investment. Few individuals or institutions have billions like the Kuwait Investment Authority, a sovereign wealth fund which invested such amounts in Merrill Lynch and Citigroup. These infusions of foreign capital helped shore up Wall Street banks and financial markets following the subprime mortgage collapse. Not coincidentally, they sped underneath the longstanding and surprisingly little-employed radar of CFIUS (see "What is CFIUS" and "CFIUS By the Numbers," below). We expect there will be greater scrutiny on these types of investments in the future.

What about public opinion? No matter the political will of senior administration officials or influential members of Congress, public opinion - perceived or real - can provide a significant barrier to entry in the U.S. marketplace.

The Dubai Ports World (DPW) controversy in 2006 is the most telling example. You probably remember the basics - a British concern operating six ports in the U.S. was sold to DPW, leaving the contract to operate those ports in the hands of a holding company owned by the United Arab Emirates.

"U.S. Sees Emirates as Both Ally and, Since 9/11, a Foe"
New York Times, February 23, 2006

CFIUS, the multi-agency panel chaired by the Treasury Department and responsible for approving foreign investment in "strategic" industries, approved the DPW purchase, but the deal collapsed under pressure from Congress, labor unions, the chattering class and ultimately the public at-large. Critics declared victory; proponents predicted new barriers to U.S. entry for foreign dollars.

They were both right. Congress soon passed the Foreign Investment and National Security Act of 2007 (FINSA), and in direct response to Dubai Ports added a provision expanding the definition of "national security" to include issues relating to "homeland security" and its application to "critical infrastructure."

What is CFIUS?

The Committee on Foreign Investment in the United States, which was established in 1975, conducts national security reviews of foreign acquisitions of U.S. businesses to determine the effects on national security.

On July 26, 2007, President Bush signed into law the Foreign Investment and National Security Act of 2007 (PL 110-49), codifying the structure, process, and responsibilities of CFIUS. Members of Committee, which is chaired by the Secretary of the Treasury, have been expanded under FINSA to include the secretaries State, Defense, Commerce, Energy, and Homeland Security, and the Attorney General. The Secretary of Labor and the Director of National Intelligence are ex officio members.

With the recommendation of CFIUS, the President is authorized to suspend or prohibit any covered transaction when (1) "there is credible evidence that the foreign interest might take action that threatens to impair national security," and (2) other provisions of law other and the International Emergency Economic Powers Act do not provide adequate and appropriate authority to protect national security.
From the U.S. Department of the Treasury background information on CFIUS.

The time is quickly approaching when Treasury will issue its new regulations, after which the CFIUS process will become more technically intricate and much more politically sensitive.
The congressional notification requirement is the most concerning, due to increased potential for leaks and distortion of facts. A process that has historically been defined as strictly analytical could become quite political.
Others worry about approval delays at sensitive times for businesses, and a possible backlash on American corporations seeking foreign investment.

Source: Congressional Research Service
Breaking Down Barriers

What can companies and government funds seeking to invest in the American economy do to succeed in this new environment? Our advice centers on knowing the new audiences and understanding where they live, what they believe, and how their concerns can be energized or minimized, as circumstances warrant.ViaNovo, in conjunction with D. Scott Parsons, has captured the current and pending climate in order to develop a new process that augments the legal and financial expertise deployed by leading investors for CFIUS and non-CFIUS foreign-fueled transactions. We envision breaking down some of the new barriers, based on the following principles:

  1. Get the technical matters right, and get the new politics
  2. Transparency ensures success
  3. Engage your overseers and regulators
  4. Deflect your foes, find and activate new friends... and most of all
  5. Fund globally, think locally

As new CFIUS/FINSA regulations are implemented and the political rhetoric against foreign investment and free trade grows, responsible American companies seeking foreign investors, blue-chip international companies on American soil, and those Americans investing overseas all share the responsibility to overcome shortsighted protectionism. Thorough analysis of the policy environment and political climate begs for a new, comprehensive approach.