The World Is Yours (With Risk): Investigating International Companies
July 2007
IN THIS ISSUE
— Going Abroad: Keys to Investing in Foreign Companies
— Bring More Than Your Atlas: Researching Foreign Companies
— In the next issue
GREETINGS!
Welcome to the July edition of our newsletter. In this issue, as we reflect upon the heritage of the United States in the summer holiday season, we’ll look abroad for the risks and benefits to your clients when the subject is overseas investment.
The benefit of investing in international markets can be huge — niches like natural resources in the Middle East or Africa present great opportunities for return on investment, and emerging markets like China and India can present a chance to utilize cheap labor and new technologies to grow an existing business. Yet there are several caveats when considering such investments.
GOING ABROAD: KEYS TO INVESTING IN FOREIGN COMPANIES
When most people think of the risks inherent in overseas investments, the first item on their agenda is likely to be the volatility of the currency exchange rates. Yet there are a number of more significant items which can affect such investments, including:
• Political volatility. One potential trade-off for cheap labor or access to new markets could be having to deal with governments that change leadership in matters of years, or even months. Such change can result in increased corruption or an ever-changing regulatory environment.
• Anti-market political philosophies. While some have argued whether the United States has fallen into this category in the last few decades, there is little question that some governments which oversee emerging markets favor a strong central government with a tight rein on the activities of its markets. Be aware of the environment, and any likely changes to tariffs and other measures, before you proceed.
• Cultural differences. Understanding differences between Western cultures and others is key, not only at the political level but at the popular level as well. After all, employees are people too, and if their new, Western employer does something offensive to their cultural norms and mores (however unintentional), negative press and possibly a work stoppage could result.
• Political corruption. Enforcement of the Foreign Corrupt Practices Act has once again hit the U.S. Justice Department’s radar, with 84 percent of FCPA violations in one study being reported by violators to Justice, in hopes of leniency. Some resulted in fees as much as $44 million.
The best way to make these assessments is two-fold: thorough researching of public records, and (whenever possible) interviews with former employees of the company, industry consultants, political figures, etc. We’ll discuss the basics of approaching each avenue of investigation.
BRING MORE THAN YOUR ATLAS: RESEARCHING FOREIGN COMPANIES
There are several tips for successfully researching potential overseas investments or partners. We have performed due diligence on dozens of potential acquisitions or business partners in Africa, the United Kingdom, Canada and elsewhere. The first advice, which could well apply to any research assignment, is to think broadly and never think “we can’t do that” or “we could never find that out” until all avenues of investigation are exhausted.
There are several sources of information that are somewhat unique to companies outside the United States, including:
• Foreign public company exchanges. If the subject company is publicly traded in Canada, the United Kingdom, or other Western markets, there is a good chance it files documents both with its home regulatory authority and the U.S. Securities and Exchange Commission (if it is traded in the United States as well.) While different from U.S. company filings, many foreign regulators insist upon a high level of disclosure. This generally declines once you leave the confines of Western markets.
• Private company reports. Privately held companies often report information to a central regulator, such as Companies House in the United Kingdom, and often self-report to third parties like Dun & Bradstreet, though the quality of this latter source’s information can vary greatly from one country to the next.
• Trade publications. Many local trade publications specialize in a region or nations’ dominant markets, such as oil in the Middle East or mining in Africa. These reports can be a valuable source of information about how well your potential investment has fared and what the competitive landscape is like.
• U.S. Justice Department Foreign Agents Registration Act (FARA) filings. Has your potential investment retained lobbyists to position itself within the United States? This will give you an indication of what its current management sees as opportunities or areas of concern in U.S. markets, as well as giving an indication of its existing clout — or lack thereof.
The other source of information is, naturally, driven by the people who have interacted with the company. These can include former employees and consultants, as well as former government officials who would have overseen that company in their official capacity. Finally, several non-governmental groups, both global and local in scope, can provide somewhat objective assessments of the political and industrial makeup of the country or region where your subject company conducts business.
IN THE NEXT ISSUE
In our August issue we’ll examine the problems posed by false statements in the marketplace, from wildly overstated expectations to insider trading and “pump and dump” schemes.