What happens when a foreign company buys, or invests in, a small U.S. business
Ask an expert about foreign capital and you'll get an earful about globalization, currency disparities, offshore production, and marketing synergies. Useful stuff, if you're trying to pass an international-finance course. But for those who are out there hunting for cash, the most pressing issues are more prosaic. Rick Feldman, for example, wanted to know if a Japanese company would pay more than a U.S. investor for his Natick, Mass.-based chain of eyeglass stores.
"We were in the throes of devaluation, and the yen was soaring. It struck me that a Japanese investor would probably value the company at a higher price than anyone else," he recalls.
Was he right? Let's just say his instincts were good: a Japanese conglomerate now owns his company, Spectron Inc.
Foreign buyers often do pay more, and not only because their wallets are stuffed with powerful yen or pounds. Motivated by different goals and governed by advantageous tax rules, they frequently see gold where U.S. buyers see silver. That trait has lately given Congress and much of corporate America a bad case of xenophobia.
But that's a shortsighted reaction. For business owners, the key issue is capital. In 1987 and 1988 alone, foreigners -- primarily British, Dutch, and Japanese -- brought more than $80 billion in fresh capital to the United States. A few years ago, foreign companies were putting that money into their own operations, in the bank, or even in Treasury bills, but certainly not into Rick Feldman's pocket. Now, they are.
Some capital may soon be channeled away from U.S. investments into cross-European acquisitions, however, in preparation for a more open European market in 1992. So U.S. companies may want to find a European investor now, while cash is still crossing the Atlantic. Moving quickly to forge a European tie also makes sense if you want to be equipped to compete in the new European Community.
To see what an injection of foreign capital is really like, take a look at two U.S. companies. The first, Feldman's Spectron, was sold to Japan's Mitani Corp. The second, Microelectronic Packaging Inc. (MPI), a Scottsdale, Ariz., maker of small ceramic packages that hold semiconductor chips, sold a minority interest to Samsung Corning Co., itself a joint venture between Corning Glass Works and Korea's Samsung Electronics Co.
To every U.S. business owner who thinks a high price is all he needs to know about an offer from an overseas company, Feldman would say, "Think again." He found that Mitani, like most foreign acquirers, had little interest in buying his company unless he and executive vice-president Jeffrey Frumkin stayed on. Because buying in the United States is to some extent an experiment -- a toehold into a new market, say -- European and Japanese companies want to buy something that already works, not something that needs fixing. And to ensure that their new purchase continues to tick, they usually insist on retaining U.S. managers.
Feldman got a taste of what that would be like early on. Typical of a foreign buyer, Mitani proved to be a real tire kicker. Kouji Mitani himself, chairman of the giant, $2-billion Mitani Corp., visited all but one of the Spectron stores as well as its competitors. Mitani officials reviewed all available documentation -- no mere scanning of a summary list for them. "They were better prepared than anyone else," says Feldman.
Obviously, Mitani knew as much as possible about what it was getting into, but did Feldman? Mitani made it crystal clear that Feldman and Frumkin were crucial to the acquisition. The Japanese company also took pains to make sure Feldman understood that its motivation was to be in the retail eyeglass industry. What Mitani could not have really prepared Feldman for was consensus management.
"Until you actually experience it, you can't conceive of what it means," he says. The changes Feldman is talking about weren't the work of a squad of managers sent over from Japan. Mitani, in fact, installed just one of its own managers, as executive vice-president of finance. (He was recently promoted to chairman of the board.) But Spectron employees bristled at his style. "It's very difficult to get used to the idea that someone in advertising may be called in to look at some new machinery," explains Feldman.
The problem wasn't with the people whose opinions were sought -- it was with those who thought their opinions should count for more. Imagine the first reaction of the guy in charge of machinery, says Feldman. "He's wondering why he wasn't asked that question." Feldman considers the infusion of an alien management style "probably healthy" but, he notes, "it's taken about a year to understand what's going on and attempt to deal with it."
For Don Jackson, chief executive of MPI, the trick to harnessing foreign capital was not only learning to live with it, but also learning to protect himself from it. Because MPI has only about $30 million in sales, compared with Samsung Corning's $800 million or so, the danger of being crushed -- intentionally or unintentionally -- loomed large in Jackson's mind.
Still, the advantages of taking on an elephantine partner outweighed the risks. When Samsung Corning, which makes about half the world's color television tubes, first approached MPI in the spring of 1987, Jackson had been thinking about raising a second round of venture capital. As their talks progressed, Jackson realized that Samsung Corning would pay about as much as venture capitalists would for a 10% chunk of MPI, but it offered much more in ancillary benefits.
Here's the deal they struck. For seven years, Samsung Corning could use MPI's manufacturing technique in Korea. Over the same period, Samsung Corning will provide MPI with personnel and facilities to pursue five research programs, manufacture MPI's specialized tooling, and build a factory that will supply both companies with raw materials. In addition, the companies struck a long-term marketing agreement.
The beauty of this kind of partnership is that the price of each agreement is negotiated separately. For the smaller company the minority investment is cash, with no strings attached. According to John D. Carton, the MMG Patricof & Co. vice-president who assisted MPI in the transaction, large companies consider an equity investment the cost of entry into a relationship. That investment also serves as insurance; presumably a large company will think twice about steamrolling its smaller partner if it stands to lose its investment as a result.
Like any long-distance relationship, this one has its drawbacks. Just putting the deal together took "tremendous persistence," says Jackson, and travel and legal expenses were high. Communication has also proved difficult. "Most Koreans speak English," notes Jackson, "but we're dealing with people for whom English is a second language." Sheer distance has been a problem as well. It's been difficult to schedule MPI management board meetings to accommodate Samsung Corning executives.
Still, the partnership gives MPI unusual flexibility. It doesn't prevent MPI from reaching a similar agreement with another company, providing yet more capital and operating benefits. This kind of relationship also can be particularly advantageous to young, still unprofitable companies. Because some offshore companies aren't required to show minority investments on their financial statements, they're not especially concerned with whether their investment is making money. Capturing technology, say, or U.S. distribution, might be their main objective.
While no one should ignore the opportunities that foreign companies are offering, no one should underestimate the potential problems either. "Culturally there's a kind of paranoia on both sides," says an executive who sold his company to a large foreign corporation more than a year ago. "They don't have complete trust in us. There are suspicions back and forth. I think they tell us as much as they think we need to know."
Yet this entrepreneur counts his sale as a successful one. He notes that many acquired companies complain about the same thing, even if their new parents hail from the good old U.S.A. What he didn't add is: capital is capital. Foreign companies' dollars are just as green as anyone else's. And for now, anyway, they're handing a lot of them out.
SCOUTING THE WATERS
How to shop for foreign investors
Offshore acquisitors are seeking stakes in an array of businesses. And their interests are likely to become even more diverse because each foray into a particular U.S. market creates a ripple effect. To safeguard their customer relationships, for example, Japanese auto suppliers have already begun to follow Japanese car manufacturers to the United States.
Troubled companies need not apply. Most foreign buyers "are not interested in helping companies work out problems," explains James Martens, a managing director of Peers & Co., based in New York City. "They'd rather pay more for a good company than buy a possible bargain with problems."
The key element to think about in looking for a foreign investor is strategy. The foreign investor is after a specific feature -- a market, distribution system, technology -- that can be linked to the business at home. Here's how to proceed:
* Research the candidates. Contact trade associations, locate foreign business directories, and read the global industry reports published by brokerage houses to learn more about your foreign competition. Don't rule out foreign companies that make your raw materials or buy what you make -- they're potential suitors, too.
* Do their thinking for them. Analyze your company's strengths and weaknesses. Look hard for unique or proprietary features -- and figure out which foreign company needs them.
* Find a financial intermediary. Foreign banks and investment banks are here in number. They're a logical first stop. Large U.S. banks, too, have extensive foreign ties. They, like domestic investment banks, should be able to help or guide you to someone who can.