Cover story on foreign direct investment into the US for Capital Thinking, the custom magazine of leading Washington DC-based law firm Patton Boggs LLP
1. PROTECT YOUR PRODUCTS FROM A RECALL • PAGE 12
CAPITAL
THINKING
BUS I N ESS, F I NANCE, POLI TICS — A N D T H E L AW
Waiting
TOP
EN for
TASONS
Capital
RE E
ORE TH
O IGN
NOT T
1
91 WHAT THE
U.S. NEEDS
ISSION
COMM TO DO TO
ACT STAY ON
TOP IN THE
GLOBAL
FINANCIAL
WIRELESS 2.0:
MARKETS
A PREVIEW
NEXT-GEN
MEDICAL
TESTS
HERE COMES
NANO-
REGULATION
F A L L / W I N T E R 2 0 0 7 • W W W. C A P I T A L T H I N K I N G M A G A Z I N E . C O M
3. “Until the members of Congress can act with more vision,
NEWS AND VIEWS,
TRENDS AND TACTICS,
we are not going to have a clear and stable policy on
STRATEGIES, INSIGHTS,
energy development and independence.”
ADVICE, LEGISLATION,
—Martha Allbright
REGULATIONS
AND MORE
CU R R E NCY BY ROBIN MORDFIN & PETER HAAPANIEMI
Doing Your
Homework on
Acquisitions
When making an acquisition,
companies often fail to look
closely at the IP involved—
and that can lead to problems,
says Toni-Junell Herbert, a
partner at Patton Boggs.
Effective IP due diligence
is key to gauging the value of
the target company’s IP. But it
can also help fend off trouble
from other quarters. “When
Question Marks Around Safety
A New Kind of Sand Trap
an acquisition doesn’t live up
to its promise, shareholders
may re-examine the deal, and
S
omeday soon, nanotechnology may help to says. “For example, aluminum is very predictable at
possibly file lawsuits,” says
transform a wide spectrum of industries. macroscale, but when you reduce it to nanoscale, its
Herbert. Due diligence can
But its power is starting to raise concerns properties change.”
forestall such problems.
among regulators, and this may have a significant Over the summer, a U.S. Food and Drug
IP due diligence should
impact on those who develop or use nanotech. Administration task force concluded that the
look to the target’s business
At the moment, nanotech regulation is sparse. agency does not yet have adequate scientific tools
context—what relevant tech-
“Right now I can think of only one actual federal to assess the effects of nanotech products on the
nologies competitors have in
regulation, and that is an EPA regu- human body and the environment.
the pipeline, for example, or
lation with respect to nanosilver For now the FDA says that it will not
whether the IP provides free-
The FDA says it
when used as a pesticide,” says regulate nanomaterials. Instead, it
dom to operate in the market-
doesn’t have the
Susan Brienza, an attorney in the will issue best-practice guidelines
place. “Pending litigation,
tools to assess the while it works to gather more infor-
Denver office of Patton Boggs who
employment agreements and
effect of nanotech mation about risks and benefits.
works with the Colorado Nano-
government contacts are also
products on the
technology Alliance. But there are Meanwhile, it will continue to regu-
important,” says Herbert. “A
some question marks around safe- human body or the late finished products such as drugs,
research agreement might
environment.
ty, she says. For example, masks cosmetics and medical devices.
have obligations that the com-
and filters used in manufacturing But OSHA and the EPA are also
pany hasn’t met, causing it to
today may not prevent nanoparti- looking into nanotech safety issues,
lose ownership of that IP to
cles from entering workers’ lungs and pores. Brienza says. Within three years, she predicts, the
the government.”
Nanotech companies are working closely with freedom that the industry is experiencing now will
IP due diligence may not
environmental groups and regulators to ensure that be over.
yield definite answers about
they are acting responsibly, says Griffith Kundahl, “Regulations are coming, and those working
whether to buy a target,
co-author of The Handbook of Nanotechnology, with nanotechnology will want to anticipate them
Herbert says. But it can help
CHRISTIAN DARKIN
Business Policy and Intellectual Property. The industry and consider taking an active role in responding to
executives understand what
understands that there are still some unknowns proposed rules. This will allow them to have some
they are getting—and steer
about nanotech and manufacturing. “At that level of influence over the form these regulations or guid-
clear of unpleasant surprises.
smallness, quantum physics kicks in,” Kundahl ance documents will take.” CT
2 FA L L / W I N T E R 2 0 0 7 • C A P I TA L T H I N K I NG
4. TOP
TEN
Energy:
Is Independence Out of Reach?
A
s this issue of Capital Thinking went to Most energy projects, from new oil rigs to
press, the final version of the new energy wind farms, take years of planning and invest-
bill had not yet been drafted. But initial ment to come to fruition. However, with the
PROVISIONS OF
versions were not especially encouraging to mixed signals Congress is sending, it becomes
THE 9/11
observers hoping the country would finally settle difficult for energy companies to determine
COMMISSION
on a workable, strategic, long-term energy policy. where best to put their assets, Allbright says. This
ACT OF 2007
“Congress cannot decide if we are working puts a long-term solution to the nation’s energy
toward energy independence or maintaining the issues only farther from reach.
BY STEPHEN McHALE
status quo,” notes Martha Allbright, a partner in “Until the members of Congress can act with
& NORMA KRAYEM
the Denver office of Patton Boggs. “In the 2005 more vision, we are not going to have a clear and
act, oil production on federal lands was encour- stable policy on energy development,” Allbright
Authorizes $5.3 billion
aged, but so were many unconventional energy says. “Politicians running for office seem to be
over five years for cities
1
forms, including oil shale, geothermic and wind agree that the United States needs to be more
at high risk of terrorism
power. The 2007 version not only slows down oil energy independent. But this will be difficult if
and $950 million over
production on federal lands, but potentially dis- we delay the development of other potential ener- five years for state, local
gy sources.” CT
courages alternative energy forms as well.” and tribal governments.
Requires 100% of all
2
Public-Private Partnerships: The RFP
passenger aircraft cargo
to be physically screened
within three years.
Key factors to consider before submitting a proposal for a public-private partnership
3
Requires 100% scanning
for infrastructure development By Dr. John B. Miller and Robert S. Brams of all maritime cargo
entering the U.S.
Has the scope of work in the RFP been defined by the
4
Authorizes $3.4 billion
public entity or by one of your competitors? Are there
over four years for public
indications that an offerer has positioned itself to
transit security.
achieve a distinct competitive advantage?
5
Will there be head-to-head, merit-based competition Authorizes almost $2
on price, on qualifications, or on a combination of billion over four years
to improve rail security.
price, qualifications and other factors?
Is the basis for evaluation published in advance, will it be Eligible Native American
6
applied during the competition, and is there an effective tribes can receive counter-
means for challenging RFP and award improprieties? terrorism grants directly
from the Department of
Is the procurement process sufficiently transparent to
Homeland Security.
potential proposers to confirm that all proposers will be
fairly treated in the competition?
Creates a new pilot program
7
Where structural design and construction are part of the for an enhanced driver’s
scope of work, is confirmation of safety a required ele- license valid for border
ment that all proposers must meet to be eligible to win? crossing between Canada,
Mexico and the U.S.
Are proven technologies that reduce life-cycle costs
8
and/or improve the quality of performance permitted The total budget for the
and encouraged? national intelligence agen-
cies must be made public.
Is a financial analysis of each proposal over the project
life cycle an important evaluation factor in the award?
The Privacy and Civil
9
Does the risk allocation in the RFP between the public Liberties Oversight
and private sectors make common sense? Does it Board will become an
assign the various risks to the party that is in the best independent agency.
position to manage and control those risks?
Requires plans for
Can the winner flexibly employ a variety of contracting and
alternative routing
10
purchasing strategies to deliver the required services? of rail and road
ROBERT PIZZO
shipments of
Are appropriate protections in place for both the public
hazardous materials.
and private sector partners in case of force majeure
events or delays by the awarding authority? CT
3
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
5. CAPITAL THOUGHTS
A N A LY S I S A N D C O M M E N TA RY O N C R I T I C A L B U S I N E SS A N D L E G A L I SS U E S
tal care but also in the diagnos-
MEDICAL TESTING tics industry. Medical testing
began to shift away from cen-
tralized laboratories to the
“point of care”—the doctor’s
office, the hospital bedside, the
drugstore and the home. Com-
panies now sell fast, accurate,
user-friendly, cost-effective tests
to monitor glucose, check cho-
lesterol, predict ovulation, detect
HIV, determine drug abuse and
more. Research and product
development is accelerating,
fueled by advances in technolo-
gy, the growing number of peo-
ple with chronic conditions, the
drive to reduce health care costs,
and the global push to fight
AIDS and other deadly epi-
demics in countries with bare-
bones medical infrastructure.
The worldwide market in
point of care testing (POCT) was
$3.98 billion in 2005, a 66 per-
cent increase over 2000, accord-
ing to TriMark Publications, a
health care market research
firm. U.S. hospitals alone ran
600 million POC tests. Per-
formed on fluid and tissue sam-
ples, POCT represents the fast-
Instant Results, est-growing segment of the $28
billion in vitro diagnostic mar-
ket, and for good reason. The
Immediate tests deliver results on the spot,
often within minutes. A pedia-
trician can swab a child’s throat,
Impact
check for strep A and start
antibiotics in a single visit. A
diabetic can monitor her blood
sugar and call the doctor at the
first sign of trouble. In a single
New testing methods promise to change day, a health care worker in a
the way health care is provided in both the remote Ugandan village can do
developed and developing worlds. Success finger pricks, find out who is in-
fected with AIDS, counsel pat-
in developing such methods will require ients on preventing transmis-
technical skill and regulatory savvy. sion and distribute life-saving
drugs. As testing technology be-
comes more powerful, it is mov-
L AW R E N C E A . S I E B E R T ing beyond patient diagnosis.
Blood-bank screening, food-
CHEMBIO
safety checks and veterinary di-
N
agnostics—all eventually will
ot too long ago, women who rely on decentralized approaches that provide
suspected they were pregnant results almost instantly.
had to go to the doctor, take a test Investors are increasingly attracted to POCT, as
and wait 10 days or more for the evidenced by strong merger and acquisition activ-
results. Today, a $6 test can do the ity in the past year. Yet the market is challenging
JOSHUA KRISTAL
job at home in three minutes, as a dark pink line and highly competitive: Home pregnancy alone
gives an answer mere days after conception. has 100 products available. Developing rapid tests
The early pregnancy test approved by the FDA for conditions that don’t have them requires tech-
in 1977 marked a turning point not only in prena- nical expertise and capital. To launch new prod-
4 FA L L / W I N T E R 2 0 0 7 • C A P I TA L T H I N K I NG
6. ucts, companies must maneuver through regula-
M U LT I M E D I A
tory systems in the U.S. and abroad. The experi-
ence of our company, Chembio Diagnostic Sys-
tems, highlights the issues facing investors in the
POCT space and suggests strategies for success.
Before 2002 we specialized in home pregnancy
kits but refocused our efforts on HIV. We targeted
the overseas market because philanthropic fund-
ing was available and the need was severe: In
some developing countries, 90 percent of those
infected don’t know it. We developed three rapid
AIDS tests, and through collaborations with lead-
ing health agencies and NGOs, including the
Brazilian Ministry of Health, the Clinton
Foundation HIV/AIDS Initiative, the World
Health Organization and the U.S. Centers for
Disease Control and Prevention, we gained
approvals, procurement certifications and distri-
bution channels for our products. We set up
offices in Africa, signed a 13-year deal with Brazil
and doubled sales of HIV test kits from 2004 to
2005. (We obtained funding for most of our inter-
national HIV work through the U.S. President’s
Emergency Plan for AIDS Relief.)
In May 2006, on the strength of our track
The Road to
record abroad and clinical trials at home, we
received FDA approval to market two HIV tests in
the U.S. The timing was fortuitous. Four months
later, the CDC issued revised recommendations,
Wireless 2.0
urging all Americans ages 13 to 64 to undergo rou-
tine AIDS testing—heightening the demand.
Our success in HIV taught us lessons about
regulated manufacturing, the need to collaborate
Unlimited mobile access to multimedia content will
with government and philanthropic organiza-
require new technologies and collaboration between
tions, and the importance of strategic partnerships
in raising cash and extending our marketing
industry and government.
reach. The knowledge we gained spurred us to
develop new products and invest in R&D. We are
selling a test for Chagas disease, an insect-borne ROY BERGER
infection endemic in Latin America. And in N E X T W AV E W I R E L E S S , I N C .
March, we won a patent for a new testing technol-
I
ogy known as the Dual Path Immunoassay. This
novel platform will enable the development of t’s a sunny Friday afternoon, and you and a few colleagues are playing a
diagnostic tests that can increase sensitivity, round of golf. By the second hole, you realize your swing is off—but you’re
extend the spectrum of useful sample types and not sure why. Then you get an idea: Why not let your favorite golf instruc-
improve results when testing for multiple condi- tor analyze your swing? So you dial his number and, through the power of
tions, among other benefits. The system may have real-time mobile video, the instructor instantly sees the problem. You’re lift-
applications for diseases, such as tuberculosis, for ing your head. Again.
which no rapid test exists. Later, in the clubhouse, you take a moment to watch a live keynote address at an
The integration of POCT with digital and wire- industry conference in Tokyo about a new regulation you’ve been following. Then,
less technologies will continue to make tests faster before dinner at the clubhouse restaurant, you make a quick two-way video call to say
and easier to use. We’re working with companies goodnight to your kids and then steal a moment to watch a high-definition broadcast
that are devising handheld readers and embedded of the last inning of that night’s baseball game. During the game, a commercial pops
chips to remove subjectivity from the interpreta- up with a personalized promotion for a new putter—the mobile network has detected
tion of test results. Anyone who has used a home you’re in a clubhouse. You decide a new putter can’t hurt, so you order it along with
pregnancy test well remembers staring at the strip some new golf balls.
and wondering: Is that the dark pink line? The After dinner, you check the traffic for the drive home by plugging directly into a
next generation of tests—in pregnancy and well webcam on the freeway. In the car you decide to download that new album you’ve
beyond—will answer unmistakably: yes or no. CT wanted and relax to music on the way home. And all of this is done on a mobile device
not much larger than a cell phone.
JOSHUA KRISTAL
LAWRENCE A. SIEBERT is president and CEO of Welcome to the world of Wireless 2.0. A world where wireless has evolved far
Chembio Diagnostic Systems, Inc., a Medford, New beyond voice and limited data and becomes a powerful global broadband ecosystem
York-based company that develops, manufactures and that can provide you with access to virtually any type of multimedia content, any-
markets rapid medical tests. where, anytime.
5
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
7. ment of WiMAX from the very beginning.
They have taken leadership positions in the
committees formed by the Institute of
Electrical and Electronics Engineers responsi-
ble for evolving the standard.
Wireless technologies are developing
faster than ever before. So it’s critical that the
wireless industry work closely with regulatory
bodies to ensure harmony between these new
technologies and the regulations that govern
the wireless business. At NextWave we regu-
larly meet with legislators, the Federal
Communications Commission and similar
bodies around the world to update them on
new technologies and to discuss how the right
regulatory environment and spectrum rules
can facilitate the introduction of new and
innovative services for consumers.
Finally, Wireless 2.0 will require a com-
plete ecosystem of new products and tech-
nologies. New classes of handsets, new mul-
timedia content management systems, new
semiconductor technologies, even new digi-
tal rights management software will all be required. But in the end,
AN EXPANDING UNIVERSE OF CHOICES
Wireless 2.0 will transform the way users and providers generate Wireless 2.0 is not about technology or regulations; it’s about trans-
and consume content. We’re all familiar with timeshifting, defined as forming people’s lives. And, of course, about helping us all im-
prove our golf swing. CT
the ability to record a broadcast, such as a TV program, for later
viewing. Global broadband connectivity will facilitate placeshifting
and screenshifting . The former allows you to watch a program where ROY BERGER is executive vice president, Corporate Marketing and
you want, while the latter allows you to watch a program on the Communications, for NextWave Wireless, a worldwide supplier of wire-
device you want, such as a mobile handheld device. less broadband products, technologies, and network solutions, headquar-
These technologies will engender an explosion of new choices tered in San Diego.
and formats, as both individuals and organiza-
tions seek new ways of capturing users’ attention.
P U B L I C- P R I VAT E PA R T N E R S H I P S
And the ability to target personalized, site-specific
Take the
advertising to a handset viewer—such as an ad for
golf clubs at a golf course—could transform the
world of advertising.
Wireless 2.0 will also help make us safer.
Private Car
Recently, the City of New York awarded a $500
million contract for citywide emergency services
and mobile broadband network to Northrop
Grumman, which uses wireless broadband tech-
nology developed by NextWave. With this new Facing tight budgets, transportation agencies are
system, first responders will have high-speed turning to private companies to design, build,
data access to anti-crime and anti-terrorism data-
bases, fingerprints, mug shots, and city maps. finance, operate and maintain new projects.
And rescue workers will be able to transmit real-
time video to a command center from the scene M A R L A L . L I E N
of an incident. D E N V E R R E G I O N A L T R A N S P O R TAT I O N D I S T R I C T
W
A HOST OF CHALLENGES
Creating Wireless 2.0, however, requires address- hen it comes to a public agency hires a private company
ing several challenges. For example, today’s cellu- infrastructure proj- or companies to design and build—and
lar networks were not designed to handle the wide- ects, my agency and sometimes to finance, operate and main-
spread use of bandwidth-intensive applications like others like it often tain—one or more aspects of a public
streaming video. New global standards such as face tight budgets, infrastructure project. And while they
WiMAX and TD-CDMA are emerging to provide short timeframes and a skeptical public. have been relatively slow to catch on in
cost-effective means of moving vast quantities of Federal transportation dollars remain at a the transportation sector, public-private
information between devices and the network. premium, so new and creative strategies partnerships are gaining in popularity
JOSHUA KRISTAL
The development of WiMAX and other stan- are needed to fund, procure and operate around the country, particularly in high-
dards requires close collaboration by technology projects of all scopes and sizes. One of way building and urban infrastructure
experts across the wireless industry. Members of these is the public-private partnership. projects. That’s because, while there are
our senior team have participated in the develop- In a typical public-private partnership, risks involved in any project, these part-
6 FA L L / W I N T E R 2 0 0 7 • C A P I TA L T H I N K I NG
8. nerships offer a range of potential benefits project was completed on budget, 22 financing through sources such as private
to public and private parties alike. months ahead of schedule. equity or bank loans. Their compensation,
in part, rests on their success in devising the
most cost-effective bid package.
PAST PARTNERSHIP SUCCESSES PRIVATE FINANCING FOR COST SAVINGS
At RTD, we have experienced these bene- A second advantage to public-private part-
fits firsthand. Private companies operate nerships is the potential for cost savings. In NAVIGATING THE HURDLES
nearly 50 percent of RTD’s bus service, the traditional model, the public agency Public-private partnerships present a host of
providing significant cost savings to riders must finance a large upfront payment to new challenges to overcome if they are to
and taxpayers. Another successful part- contractors and then shoulder operating fulfill their potential. By their nature, the
nership was the T-REX Transportation expenses. When the private partner agrees number of stakeholders involved in these
Expansion Project, a $1.67 billion venture to finance the project (as well as design and partnerships is large—not only federal, state
that included 17 miles of highway build), construction and operating costs can and local funders, but also the public, advo-
improvements, 13 new light-rail stations be effectively amortized over 30 years or cacy groups and now private partners
and 40 miles of commuter rail track. more, improving cash flow. including contractors, lenders and investors.
In the traditional contracting model, the RTD has launched FasTracks, a $6.2 bil- Therefore, public and private partners must
public agency must manage several contrac- lion, 12-year program to expand rail and bus strive for transparency and efficiency. Public
tors. When a problem arises, contractors service throughout its eight-county service participation is important, and a vigorous
will sometimes blame each other. The area. Two of the commuter-rail corridor proj- education plan can help all parties feel they
agency is forced to wade into the conflict, ects that are part of the FasTracks program have a stake in the project’s final outcome.
which requires time and money. But when a have been selected by the U.S. Department It’s also useful for each side to recognize
single organization takes responsibility for of Transportation for participation in a pilot that the other is powered by different
all aspects of both design and construction, program, known as Penta-P, to evaluate the motives and faces different constraints. For
the line of responsibility is clear. benefits of public-private partnerships for example, public agencies may have to cope
T-REX employed the design-build part- federally funded transit projects. with funding limits, labor rules or procure-
nership model, which means it utilized a For the Penta-P portion of the project we ment rules unknown in the private sector.
single contractor to oversee both design and have hired Goldman Sachs and JP Morgan Private parties must demonstrate a substan-
construction of the project. Project guide- as advisers to take advantage of the financial tial ROI. Hence, communication is impor-
lines held contractors accountable for mini- experience found in the private sector. These tant for each side to understand the other’s
mizing traffic disruptions. As a result, the advisers will assist us in finding a single mind-set and ultimately for the successful
ERIK STENBAKKEN
planning and execution of the project. CT
program kept all existing lanes open during concessionaire to handle design, construc-
peak traveling periods and even created tion, finance, operation and maintenance
MARLA L. LIEN is general counsel for the
additional capacity during portions of the for both of these commuter-rail corridors.
construction schedule. Nevertheless, the They will also investigate ways of obtaining Denver Regional Transportation District.
7
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
9. Have Capital, Will
Global FDI 2004-06 in billions
2004 2005 2006
U.S. 122 U.S. 99 U.S. 177
U.K. 56 U.K. 164 U.K. 169
12% World 710 World 916 World 1,230
FDI represents more
than 12% of the total
U.S. capital stock.
Perception of a difficult and even
unwelcoming U.S. investment climate
has foreign firms thinking twice about
crossing the U.S. financial border
Giant international investment
funds. Rival stock exchanges.
The U.S. is facing a rapidly Brazilian stocks
are soaring.
changing global capital market.
What will it take for America to
remain the world’s premier
financial destination?
BY JEFF HEILMAN
I
n a story that could be comical save the circumstances, Hungry for more? The all-world deal du jour is the
Red Herring reported that during the battle with titanic fight between Barclays and the Royal Bank of
Hezbollah in the summer of 2006, Israeli entrepre- Scotland for Dutch bank ABN Amro, priced at nearly $100
neurs-turned-soldiers were transacting deals from inside billion and involving a mix of European, U.S. and Asian
tanks and bomb shelters. Amid an exploding global capital suitors. Headier still is the estimated $2.5 trillion primed
market, perhaps nothing is surprising; money is in motion every- for worldwide deployment from the state-backed “sovereign wealth
where, with few corners untouched by international investment fever. funds” of China and other countries.
Even a short list paints a big picture. The rupee is spiced up; China’s Manna, manna everywhere—but how much will fall on the
economy is ablaze; Russia has a nominal GDP of $1.2 trillion. The United States? The U.S is still the world’s preeminent financial
World Bank reports that a record $325 billion in foreign direct invest- center, but its leadership in outward and inward investment is slip-
ment (FDI)—roughly one-quarter of the global FDI total—flowed into ping. Representing more than 12 percent of the total U.S. capital
developing countries last year, driven by a relentless M&A market that stock, FDI is vital to the U.S. economy, helping domestic compa-
as of this September, has already blazed a 9,178-deal, $1.36 trillion trail nies penetrate markets abroad and boosting American wages, tax
across Europe alone. Brazilian stocks are soaring, New Zealand VCs revenues and productivity. But perception abroad of a difficult and
are prowling, and euros are flowing into places like Serbia and Estonia. even unwelcoming U.S. investment climate has foreign firms
8 FA L L / W I N T E R 2 0 0 7 • C A P I TA L T H I N K I NG
10. Travel: The Future of the U.S.
in a Mad Money World
Energy and natural resource
centers such as the Middle East
and Russia are booming.
Euros are flowing
into places like
Serbia and Estonia.
China’s economy expanded
by a remarkable 11.4% in the
first half of this year.
$325 billion in foreign
direct investment
(FDI)—roughly one
quarter of the global
FDI total— flowed into
IPOs hosted over
developing countries
$1 billion
last year.
2001 2006
57% 16%
U.S.
33% 63%
Europe
10% 22%
Asia
New Zealand’s
venture capitalists
are on the prowl.
thinking twice about crossing the U.S. financial border. not be easy. In a time of shifting
Complicating matters further is the current crisis of confidence global wealth and growing liquidity
in the markets, sprung this summer by defaulting subprime mort- abroad, the dominance of U.S. capital-
gages. Even with U.S. stocks reacting favorably to the Fed’s ism may be waning—and fixing the problem requires walking a del-
September 19th lowering of the lending rate, the first in four years, icate line between protecting the money and protecting the nation.
anxiety abounds. Following the media day-to-day can be nerve- “The U.S. was the primary force for pushing policies that set
wracking. September 12: “Home loan demand is up as rates tum- globalization in motion,” says Patton Boggs’ Jay Gladis, also a New
ble.” One week later: “The residential real estate downturn could spi- York corporate partner. “Now, it must find great nimbleness and
ral into ‘the most severe since the Great Depression.’” ingenuity to stay ahead.”
Regulators, bankers and politicians are worried. “The dollar is
down, public offerings are going abroad, and for now, there remains THE AMERICAN ADVANTAGE?
significant pressure to privatize, which is altering foreign attitude to As an investment center, the U.S. is hard to beat. Few countries can
investment and capital raising here,” says Timothy Pfister, a corpo- match the sophistication, size and liquidity of the U.S. capital mar-
rate partner in Patton Boggs’ New York office. The SEC is promoting kets; the marketplace offers unparalleled depth and diversity; the
reforms designed to restore foreign confidence. But the effort to win political and financial environments are relatively stable; and the
back hearts while fraud-proofing America’s financial industry will legal infrastructure is attractively even-headed and egalitarian.
9
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
11. such as the NYSE or NASDAQ,
Homeland Security: to raise capital internationally.”
McKinsey warns, “Within 10
New Rules for Investors years ... we will no longer be
the financial capital of the
world.”
The controversies over the Dubai tial foreign acquisitions of U.S. federal government alone.” The
America’s open-floor, open-
Ports World and CNOOC deals assets, has until April 2008 to Department of Homeland Security
door landscape seems to be los-
showed that when it comes to for- define which industries will com- requires the cooperation of the pri-
ing favor: Foreign and private
eign investment in the post-9/11 prise “critical infrastructure.” vate sector as well as other levels of
exchanges as well as dark pools,
world, some economic sectors are Since DHS is responsible for pro- government, explains Krayem.
algorithmic trading and other
more sensitive than others. The tection of critical infrastructure, it Whether owned by foreigners or
clandestine techniques are
White House made this clear in its is safe to rely on this list until that domestic investors, a company in
diverting further liquidity away
National Strategy for the Physical guidance is issued, says Patton one of these sectors is “uniquely
from U.S. public markets.
Protection of Critical Infrastructure Boggs’ Norma Krayem. Foreign positioned to provide information
But weeding out what
and Key Assets, which identified investment in these areas is not about the infrastructure it owns and
McKinsey calls the U.S. regula-
“critical sectors”: Agriculture and unwelcome, but foreign investors operates,” the National Strategy
tory framework’s “thicket of
Food, Water, Public Health, Emer- will need to be aware that they may says. As such, it is expected to be
rules” may not be enough to
gency Services, Defense Industrial face an additional layer of review. vigilant and proactive in making
improve the investment pas-
Base, Telecommunications, Energy, The National Strategy also efforts to minimize vulnerability to
ture. Already losing ground to
Transportation, Banking and defined the concept of “homeland terrorist attack.
Europe and Asia in the capital
Finance, Chemical Industry and security.” Unlike national security— The overall message is clear:
markets, the U.S. must con-
HazMat, Postal and Shipping. historically the sole responsibility of Whether it’s your homeland or not,
tend with changing foreign
The Committee on Foreign the federal government—homeland you’ll be expected to make home-
investment strategies and the
Investment in the United States, the security is “a shared responsibility land security a high priority if you
dramatic surge of wealth
federal panel that evaluates poten- that cannot be accomplished by the invest in these sectors. —J.H.
abroad.
“From a risk perspective,” says Gladis, “the U.S. is still the safest THE DECLINE OF OLD-FASHIONED BANKING
bet.” New York in particular is especially attractive abroad “because “The incentive to invest in America has shifted from the public mar-
of its dedicated financial and legal culture,” notes Pfister. kets to the private, or alternative asset, industry,” notes Pfister.
“Agreements struck here are the real deal—parties can expect per- “Runaway spending and offshore borrowing have left the U.S. with
formance while counting on all available legal recourse.” the world’s largest account deficit, making it the world’s leading deb-
Nonetheless, even as global FDI rose 34 percent from 2005 to tor nation. Relatively weak against the euro, the sterling, even the Ca-
2006, the U.S. is losing ground. While last year’s $177 billion inflow nadian dollar, dollar-denominated assets are essentially on sale. The
(out of $1.2 trillion global FDI) was good enough to reclaim the incentive for offshore players to come here is therefore a monetary
world’s top spot from 2005 winner the United Kingdom, the U.S. is one, to take advantage of currency conversion and to leverage their
well off the peak of $321 billion in 2000. competitive edge on valuations.” With the continuing trend away
What happened? Some investors may have been put off by the from listing publicly in the U.S., driven by the Sarbanes-Oxley cor-
U.S. government’s thwarting of Dubai Ports World’s proposed porate reform act of 2002 (SOX), Pfister sees the foreign modus
takeover of P&O last year and China National Offshore Oil operandi changing.
Corporation’s run at Unocal in 2005—transactions that would have “The total asset value in private equity is truly astonishing,” he
transferred control of U.S. shipping and energy assets into foreign says, “but of course, those dollars have to be put into play. The tradi-
hands. Most observers say, though, that the biggest deterrent is the tional private equity play has been to acquire and burnish assets
over-regulated, over-litigious U.S. public market. before divesting them to a strategic buyer. With the public markets
“Before the Internet bubble burst,” says Patton Boggs’ Michael drying up, though, private equity investors are making more pure
Smith, another New York corporate partner, “foreign start-ups often financial plays, frequently trading assets among themselves.”
skipped their own exchanges and headed straight for NASDAQ. But Following this trend, foreign investors coming to the U.S. are not
then came the scandal-driven re-emphasis on anti-fraud measures, seeking traditional public exits, which Pfister describes as “a star-
which significantly increased the cost of raising capital in the U.S. tling new development.”
and scared IPOs and foreign investors abroad.” Gladis sees private equity and other increasingly arcane funding
How scared were those investors? In 2001, the U.S. hosted 57 instruments pushing banks to the sidelines and taking democracy
percent of IPOs valued over $1 billion, compared to Europe’s 33 out of the U.S. capital markets. Echoing his concern is England’s
percent and Asia’s 10 percent. Last year, the picture flipped, as the Chancellor of the Exchequer, Alistair Darling. Commenting on the
U.S. scraped in 16 percent versus Europe’s 63 percent and Asia’s risk associated with today’s “fantastic ways of making money,”
22 percent. Darling was quoted as saying that “going back to old-fashioned
Foreign money and hot offerings that once flowed through banking may not be a bad thing.”
U.S. public exchanges are ducking public disclosure and scrutiny The backlash against SOX is having a splintering effect as well,
here by going abroad, or going private. U.S. Treasury Secretary spurring some domestic financial players to create private exchanges.
Henry Paulson, New York City Mayor Michael Bloomberg and Dubbed “A Child of Regulatory Decay” by financial blogger Roger
New York Senator Chuck Schumer are among influential voices Ehrenberg, Goldman Sachs’ “GS Tradable Unregistered Equity OTC
concerned about the weakening competitive positions of New Market” is open only to sophisticated investors—and largely free
York and the U.S. A McKinsey & Co. report commissioned by from the regulatory requirements of traditional share offerings.
Bloomberg and Schumer states that, “The world’s corporations no Rivals include NASDAQ’s PORTAL system and closed exchanges at
longer turn primarily to stock exchanges in the United States, investment banks such as Citigroup, and Lehman Brothers.
10 FA L L / W I N T E R 2 0 0 7 • C A P I TA L T H I N K I NG
12. Another seismic shift is the sheer volume of available free capital swirl of skepticism about investing in the U.S. “Foreign investors
concentrated in the booming Asian markets and energy and natural still have an enormous thirst for U.S. capital,” says Smith, “and the
resource centers such as the Middle East and Russia. Pfister sees ener- SEC, mindful of investors’ problems in accessing the U.S. capital
gy in particular as the epicenter of the global capital shift. “Energy markets, has recently introduced reforms to make their life easier.”
inextricably binds us together,” he says. “Some have it but we all need In 2006, Rule 144A private placements—influential in the
it, and from oil and gas extraction to alternative fuel development, heightened trend of private-to-private sales—raised $162 billion in
global energy interdependence runs right alongside the transactional the U.S., compared to $154 billion raised publicly. “Rule 144A
and financial markets. Carbon credit trading, derivatives trading, proj- allows the resale of restricted securities among qualified institu-
ect finance—you name it, energy-themed transactions run the gamut. tional buyers, often without reconciliation of an issuer’s financial
Take Canada, for instance, sitting on enormous reserves of hydrocar- statements to U.S. GAAP,” says Smith. “The SEC has proposed
bon-yielding tar sands, which hold the promise of huge revenue easing the resale restriction by shortening the statutory hold peri-
streams. But unbinding and distributing that fuel, in turn, takes huge od from one year to six months, along with other amendments.”
amounts of energy and capital. Energy is more fundamental than Other reforms ease registration restrictions for smaller companies,
money and as complex as your imagination will allow.” expand the definition of accredited investor, and liberalize certain
rules covering financial reporting, accounting and delisting (see
sidebar, below). “The SEC’s intent,” says Smith, “is to send a wel-
SOVEREIGN FUNDS: CAPITAL ON THE LOOSE
Energy revenues create big profits and big capital reserves. So does come message to foreign investors.”
rapid economic growth, such as China’s remarkable 11.5 percent
expansion and $112 billion trade surplus this year. Deep in liquidity, PROTECTION, OR PROTECTIONISM?
China, along with a roster of mainly Asian and Middle Eastern coun- As new doors open, however, homeland security issues are threat-
tries (plus Australia, Norway and the U.S.), is buying foreign assets ening to close them again. For more than three decades, the
through state-backed investment pools known as sovereign wealth Committee on Foreign Investment in the United States (CFIUS)—
funds. “China,” notes Gladis, “used to park its surplus funds in U.S. the multi-agency federal panel responsible for evaluating potential
Treasury bonds, until they realized they were missing the boat on foreign acquisitions of U.S. assets—generally operated under the
more profitable ventures. Along with their sovereign fund counter- radar, quietly reviewing deals in the telecom, defense and other
parts, they are recycling their high profit margins into long-term, industries. Then came the failed Dubai Ports World and CNOOC
strategic investments, including buyouts.” deals, which exposed CFIUS to the harsh glare of Congressional
The Washington Post writes that these funds “dwarf almost any- lawmakers irate from being excluded from the review process.
thing in the private sector,” with annual growth large enough to “buy “The storm certainly caught people off-guard,” says Norma
up every one of the $461 billion worth of bonds issued last year by Krayem, a senior policy advisor in Patton Boggs’ Washington, D.C.,
the governments of Europe and the United States—and still have office, “but it was not surprising in a time when the concept of
$720 billion left over.” Their strategic moves are momentous, too— national security in a post 9-11 world was dramatically changing.”
government-backed lenders in China and Singapore contributed After quashing the deals, the Senate proposed a heavyweight bill
around $18.5 billion to help Barclays in that bid for ABN Amro. tightening CFIUS review and emphasizing the protection of “crit-
While presently as secretive as the private equity realm, these ical infrastructure” in the U.S., including airlines, energy and ports
government funds—Norway’s is considered the most transparent— of entry. The business community, fearing the bill’s deterrent
are seen as generally beneficial to the world’s financial markets. The effect, protested loudly enough to persuade Congress to draft less
possibility exists, however, that these giant pools of capital, with restrictive legislation. Among a host of provisions, the bill requires
increasing influence over major dealmaking, may choose to bypass Treasury Department approval of CFIUS-reviewed transactions,
the dollar and the U.S. Presidential approval of cases deemed to concern national security
The SEC now realizes that swift action is needed to counter the and notification of Congress of all proceedings.
Krayem sees the revised bill,
signed by President Bush this
July, as a way to ensure increased
A More Flexible SEC transparency. “The U.S. isn’t say-
ing it does not welcome foreign
direct investment; rather, it is
Responsible for protecting U.S. issuers, investors and Financial Reporting: This May, the SEC adopted new inter-
inviting foreign firms to transact
capital, the SEC is the world’s toughest securities regu- pretative guidance on internal controls. Intended to make
business here according to a set
lator. When protections become deterrents, though, SOX 404 compliance more cost-effective, the new rules
of rules and understandings that
the safeguards have to change. As SEC Chairman recognize that companies have varying risk and fraud
make sense in a world that has
Christopher Cox said recently, “we have climbed down assessment requirements. Managers are now permitted to
been redefined by terrorism.”
from our regulator’s ivory tower and planted our feet exercise “reasonable” judgment in tailoring controls com-
Presumably, foreign firms
firmly on the ground.” Fraudsters should still beware, mensurate with their company size and complexity. The
will view the new bill and the
but foreign companies wanting to make an honest buck change is aligned with a more flexible new auditing stan-
dard from the Public Company Accounting Oversight Board. SEC’s reforms in the same light,
in the U.S. should take note of some recent reforms:
appreciating that the U.S. is
inclined not toward protection-
Accounting Rules: The SEC is close to eliminating the Delisting: The SEC is also making it easier for foreign
ism but protection—of its
burdensome and expensive mandate for foreign compa- companies to delist from U.S. exchanges and deregister
investors, issuers, capital and
nies to reconcile their financials with U.S. GAAP stan- with the SEC. While the predecessor rule may have
national interests. Krayem is
dards. The change would allow public companies to scared foreign investors away, the SEC believes that the
optimistic. “Finding the right
choose between GAAP and International Financial new regulation will serve to reinforce America’s message
balance will take time,” she says,
Reporting Standards (IFRS), used by over 100 countries, of openness. To qualify, companies’ U.S. trading must
“but it is something everyone
including the EU. The measure, currently in the public be less than 5 percent of their worldwide volume, while
will work hard to achieve.”CT
comment period, would apply to 2008 annual reports. meeting other reporting and listing requirements. —J.H.
11
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
13.
14. THE CONSUMER PRODUCTS CRISIS
HOW TO GET
BACK
ON
TRACK
In this global marketplace, how can a consumer products company
protect consumers and keep its supply chain safe?
B Y M E L A N I E L A S O F F L E V S | I L L U S T R AT I O N B Y L O R R A I N E T U S O N
T
oday’s consumer marketplace can seem fraught with and imported from overseas. Supply chains are longer than ever, and
dangers—lead paint in children’s toys; dangerous tires; more companies are forging complex partnerships to maximize effi-
toxins in catfish, juice, toothpaste and pet food. Deaths, ciency and remain competitive.
injuries and property damage from consumer product Avoiding recalls and bad publicity can seem a daunting chal-
incidents cost the nation more than $700 billion annu- lenge for any consumer products company. Fortunately, there are
ally, the Consumer Product Safety Commission reports. The CPSC a variety of ways to prevent these problems through proper plan-
issued 320 recalls through the third quarter of fiscal 2007. ning and oversight.
While the number of dangerous or shoddy products is actually
quite small relative to the tens of thousands that reach the market PROBLEMS, PREVENTED
each year, one negative story can be—and has been—enough to In the fall of 2006, some 37 brands of bagged spinach were found
frighten consumers and impact business. And the potential source to contain E. coli bacteria that killed three and sickened more than
of risks for consumer products makers is growing. Thanks to glob- 200 people in 25 states. The U.S. Food and Drug Administration
alization, more products and components are being manufactured eventually concluded that the epidemic could be traced to a single
13
C A P I TA L T H I N K I NG • FA L L / W I N T E R 2 0 0 7
