Step 4: Embracing FDI Mergers & Acquisitions

This section discusses FDI mergers and acquisitions (M&A), including the importance of this mode of FDI to communities and acquired companies. Many EDOs are rethinking their roles and embracing foreign M&A. This section identifies ways that regions can attract and support M&A activity from foreign investors, and leverage foreign M&A as a positive source of investment for companies in the region.

Guidance

Historically, EDOs have avoided support for foreign investment through M&A because they do not immediately impact jobs and because M&A can result in consolidation, downsizing, or closure — relocating operations or shifting volume outside the region. However, FDI M&A is too large to be ignored, and can benefit acquired companies and their communities. Since mergers and acquisitions make up the vast majority of foreign investment (98 percent in 2016), some regions are now considering a strategy for this type of FDI.

For foreign investors, M&As provide a lower-risk path into a geographic market, which means that although there may not be an immediate hiring of additional workers, the transaction may afford some of the same types of benefits as greenfield FDI, such as future expansion opportunity and the potential to attract other foreign investors from the same country … and M&A can provide valuable infusions of investment capital for struggling firms as well as startups or gazelles.”(IERC Final Report, p. 39).

See the video below about how Louisville views the role of foreign investment through M&A, and their strategy of supporting mid-market firms.

Embracing M&As
Foreign M&A is too large to ignore and can have benefits for acquired firms — Lessons from Brookings GCI

Brookings: “What can metro areas do about foreign mergers and acquisitions?“… metro areas can’t afford to ignore it. It is the dominant form of FDI, accounting for 87 percent of foreign capital inflows into the United States from 1992 to 2008 … And though M&A does present risks of closure or downsizing, metro leaders with a commitment to understanding and responding to M&A can mitigate potential downsides … M&A is a pervasive market reality … many foreign investors rely exclusively on M&A to enter the U.S. market.”

“[M&A] can transform mid-sized firms by providing the cash, expertise, relationships, and technology required to compete in global capital-intensive industries … M&A is a pervasive market reality. Many U.S. firms, at some point in their life cycle, want to be bought. A 2014 survey revealed that 36 percent of mid-sized firms were either in the process of being acquired, or open to the possibility in the next year.”

Metro FDI Plan –Syracuse CenterState New York GCI plan “M&A can lead to job growth, financial stability and enhanced competitiveness. Even in instances of job reductions, M&A often results in a company staying in the region versus closing operations entirely or moving outside of the area, and can enable infrastructure and capital investments (p.7) … M&A projects with positive results do not garner as much public attention. There are many examples of M&A activity helping a struggling firm to recover, stabilize, and grow, and create investments, wealth and jobs in the region.” (p.15).

Brookings: FDI in U.S. Metro Areas: The Geography of jobs in foreign-owned establishments(p.7): “Foreign M&As often lead to improvement in management practices, open distribution channels for exporting, and provide investment dollars for expansion … Recent research has shown that three years after a foreign acquisition by a firm from another developed country, target companies are more productive and more profitable with more employees and higher sales than peer companies acquired by domestic firms … What is more, affiliates established through M&As conduct more R&D than those established through greenfield investments, and several studies now suggest that M&As have greater positive spillover effects on local economies than do greenfield investments.” (Also see page 6 for case examples of the value of foreign acquisition to the target companies: MedImmune in Maryland, Inficon in Syracuse, and Sprint in Kansas.)

Embracing foreign investment through M&A requires a rethinking of the role of EDOs.

Rethinking the Role of EDOs

Brookings: FDI Planning Guide- A blueprint for metro teams pursuing global economic engagement discusses the M&A challenge for EDO roles (p.12): “EDOs are concerned that M&A transactions could lead to downsizing or closure, and they often don’t want to become deal ‘brokers.’ However, they increasingly understand that M&A is a market reality and that they must determine how they will engage with it in an economic development capacity, including focusing on aftercare and robust business retention and expansion programs.”

“This reality forces EDOs in the region to rethink their roles in FDI and in economic development overall … Traditionally, state and regional EDOs have focused on job creation through business attraction. However, while EDOs focus on job creation, this isn’t at all the goal of the companies they are dealing with. Companies create jobs to promote business growth and address constraints … The global planning process has forced EDOs to consider not only the ways to reconcile this but also the importance of other driving factors, such as firm and regional competitiveness, that make the role much more complex and demanding.”

Aftercare for foreign firms involved in M&A

Some of the trade and investment plans developed as part of the Global Cities Initiatives addressed M&A, including the San Diego plan, which incorporated a strategy to connect acquired firms with key regional research assets and relationships to discourage foreign parent firms from relocating operations outside of the region. (IERC Final Report, p. 39)

Reorienting BRE to Welcome Foreign M&A

Brookings: What can metro areas do about foreign mergers and acquisitions?“… perhaps most important, is reorienting business retention and expansion programs to welcome new foreign owners and address the needs of acquired firms.”

“While becoming part of a larger, more sophisticated multinational is often hugely beneficial, it also presents new threats in that the local operation must compete for the funding and attention of the parent among many other current and future global sites.”

“Economic development leaders in Minneapolis-St. Paul proposed the creation of ‘rapid response’ teams of state and regional EDOs and service providers to immediately engage with the leaders of acquired local operations, with the goal of helping them demonstrate the value of the region to the foreign parent and attract further investment.”

Aftercare of Foreign M&A in GCI Metro Plans

Centerstate New York Global Investment Initiative (p.23): EDOs should ensure that foreign owned companies (greenfield and M&A) are welcomed and supported through an aftercare program that helps to “ensure their growth and expanded foothold in the U.S. market,” as “these firms are susceptible to relocation out of the region if they are not adequately supported.”

Other metro plans have incorporated this type of aftercare program for M&A:

Suggested Aftercare Action Items After a Foreign M&A Transaction - Frontlines Coalition

FDI Frontlines Coalition: FDI’s $400 Billion Secret Ingredient – How adding cross-border M&A to your economic development recipe can deliver sweet success

Example:

  • New Jersey Lt. Gov. Kim Guadagno routinely publicizes her personal cell phone number to underscore her availability and commitment to help companies navigate state government incentives and permitting processes…” 

Develop and train an M&A action team. (p.15):

  • “Identify who is going to reach out to the new company, elected officials, media outlets, etc.”
  • “Develop a communications strategy that reinforces your community’s brand.”
  • “At the same time, determine the other community partners that can help with a smooth transition, such as business services, utilities, and regulators. Identify this team ahead of time and train all stakeholders on how best to represent your community.”

“Create an M&A ‘Go-Bag'(p.17): “EDOs can be most helpful immediately after an M&A transaction is announced…”  Report discusses 4 elements of the “Go-Bag”:

  • “Engage community leaders and elected officials”
  • “Appoint a senior point-of-contact”
  • “Create a deliberate media plan”
  • “Connect with community partners, suppliers, and customers.”

Education and managing the public perception of M&A

Embracing foreign M&A requires educating regional stakeholders and managing public perception.

Managing Perception of M&A

FDI Frontlines Coalition. “FDI’s $400 Billion Secret Ingredient: How adding cross-border M&A to your economic development recipe can deliver sweet success”, (p.10): “EDOs can improve the environment among elected of officials, community leaders and local media long before an M&A transaction is announced …These “beforecare’ efforts will position the EDO as a key resource for potential investors and build a community better prepared to thrive in the 21st century economy … In addition, beforecare reduces the possible political backlash and diminishes the amount of unhelpful rhetoric that could damage your region’s brand.”

Metro Atlanta: Foreign Direct Investment Plan (p.27): “Design an M&A crash course to raise awareness of foreign M&As among metro Atlanta EDOs, the media, elected officials, and the general public by highlighting the frequent positive results of such transactions, even though they aren’t always in the form of new jobs, and by educating about possible downsides … Highlight local M&A successes by regularly talking about them on online resources and social media and by encouraging area media to report about them … Educate the media about the positive aspects of M&As to help ensure that members of the media ‘get’ M&As and report about these transactions in a positive light.”

FDI Frontlines Coalition: FDI’s $400 Billion Secret Ingredient: How adding cross-border M&A to your economic development recipe can deliver sweet success, (p.14-15)  “It is important to raise the ‘global business IQ’ of your elected of officials, business leaders and media to improve the environment for future M&A by regularly discussing the benefits of global trade and investment … Track company success and progress … Often, the positive impacts of M&A transactions reveal themselves over several years. Be prepared to share success stories with the public and policymakers…”

Brokering Deals

Some regions are actively facilitating foreign acquisitions and mergers.

Facilitating Deals and Identifying Potential Acquisition Targets

What can metro areas do about foreign mergers and acquisitions? “… Columbus 2020, the region’s EDO, has started to bring lists of potential local acquisitions on its international business trips. By appealing to investors’ interests and demonstrating knowledge of their own market, this practice has opened doors to more productive conversations about both M&A and new investment opportunities. To build these lists, EDOs need to invest in market research and establish relationships with lawyers and bankers who are closely connected to the market.”

Syracuse CenterState New York GCI plan “While M&A activity is outside the control of the region, the ability to influence the outcomes 
is increased through greater engagement in the process.” (p.15)… Actively seek to identify and connect legacy industries and struggling companies to regional M&A service providers and foreign investors. Facilitate a process based on historical outcomes that will produce positive results for these companies and the community.” (p.22)

FDI’s $400 Billion Secret Ingredient: How adding cross-border M&A to your economic development recipe can deliver sweet success:

  • Describes the role of the state of Connecticut in helping an Italian aerospace company to buy a local “high precision” aerospace gas turbine component manufacturer that had run into hard times (p. 8-9): “Connecticut Approach is akin to a customized concierge service. Each investor sits down with the state and together they create a tailor-made plan to help realize business objectives. The state works to connect investors with suppliers, customers, and other key business stakeholders. If an investor is looking for real estate assistance, integration into cluster groups or other multiplier networks, connections to a community’s schools and colleges or introductions to service providers, Connecticut can help here as well.”
  • “Provide a One-Stop Global Business Resource: Even domestic companies have trouble navigating the overlapping regulatory systems of national, state, and local jurisdictions. You can help global investors avoid missteps by connecting potential investors with someone who can walk them through the myriad of regulations. While you may not be able to answer every question, being able to connect executives with experts is critical.” (p.15)
  • “Establish a Distressed-Company Database: Cross-border M&A can also be a valuable tool for prepared EDOs. EDOs that internally track distressed companies, or those actively pursuing equity infusions and growth opportunities, can help discreetly connect local employers with foreign direct investors. Such efforts can help protect quality jobs in your region.” (p.15)
  • See page 19 of the report to read more on “What to do when M&A opportunity arises”

Resources

Why foreign firms acquire U.S. companies

Profile of FDI M&A targets

For an explanation of the M&A process and advice for the target company by an attorney, read: “Understanding the Process of an M&A with Foreign Investors”; Ahvi Spindell

IERC Final Report:“International Engagement Ready Communities: Effective Practices & Determinants of Foreign Direct Investment & Export Success, Final Report”

Brookings GCI:

GCI Metro FDI Plans:

FDI Frontlines Coalition. FDI Frontlines Coalition provides state, regional, and local EDOs with the opportunity to enhance their global investment IQ by providing research and business insight while also amplifying their voice on ways America can attract more foreign direct investment. Supported by the Organization for International Investment:

Business Roundtable. An association of chief executive officers of America’s leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy.

Spindell, Avi: “Understanding the Process of an M&A with Foreign Investors – Industry Market Trends – ThomasNet News”; published on thomasnet.com; November 26, 2013