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— Analysis —
Where do you stand? In an FDI setting, as in life, it's vital to know oneself. Before doing anything else, scrutinize yourself as U.S. regulators -- and others -- would do. As an investor, you should evaluate a number of factors, including your ownership, line(s) of business, management, board of directors, business relationships and home country relationship with the U.S. This basic self-diligence will help identify investor-specific tender points that may emerge as vulnerabilities later. Parallel diligence should apply to the prospective transaction itself. It is vital to assess whether (and why) the target company's industry is regulated and determine how deal structure may mitigate -- or inflame -- underlying concerns.
Have you identified the "nonmarket" risks? Generally, these risks fall into five categories: National security regulations. Not every FDI transaction is subject to a national security review, but failure to properly engage and navigate the Committee on Foreign Investment in the United States, or CFIUS, process when appropriate can lead to serious trouble. Sector-specific federal regulations. Foreign investors in particular should become familiar with the sector-specific (e.g., energy, transportation, communications, banking, defense and aerospace, etc.) federal regulations to which they may be subject. Standard U.S. requirements. Investments made by foreign investors are subject to many of the same legal obligations imposed on U.S. businesses. State regulations. Many U.S. states also regulate certain types of foreign investment. The most commonly regulated are the insurance and real estate industries, but these are not the only ones. Political risk. The U.S. regulatory review process is rigorous and professional. It's important to keep in mind the significant interplay between the executive branch and Congress, particularly on deals that may attract public attention. Have you managed these risks strategically? The recent history of scuttled FDI transactions teaches an important lesson: Regulatory and nonmarket risk is better managed strategically, not tactically. A strategic approach accelerates the evaluation of these nonmarket issues to the front end of a deal so that their consideration is integrated early on in the evaluation of the intrinsic business case. This analysis should complement your intrinsic business analysis, not drive your investment decisions. When done well, this integrated investment methodology will help clarify the value, risks and opportunity costs of pursuing one deal over another and sharpen your firm's FDI acuity. This approach should also reduce your legal fees and almost certainly reduce time and fees wasted on transactions that go nowhere. How will you build -- and maintain -- situational awareness? In an FDI scenario, it's important to be aware of where likely risks will arise. This should be done continuously, from early deal structuring to completion. While every deal is different, certain constituencies are almost always important, including the regulatory agency or agencies, Congress, state and local authorities, your shareholders and stakeholders, competitors and the media. Failure to take them into account from the outset could derail an otherwise sturdy transaction. Do you have the tools to get the deal done? At least four transaction capabilities are at a premium in the FDI context: an integrated, cross-disciplinary legal capability in corporate transactions and U.S. regulatory law; senior-level policy expertise in the policy drivers of U.S. regulations; political and government relations capabilities; and an understanding of the unique requirements and sensitivities of foreign investors and boards. Asking these five questions will go a long way in positioning you for FDI success. With sound strategy and tactics, foreign investors can efficiently and (relatively) painlessly access the plentiful opportunities the U.S. market has to offer. n Mario Mancuso, international corporate partner at Akin Gump Strauss Hauer & Feld LLP in Washington and New York, served as U.S. undersecretary of commerce for industry and security from 2007 to 2009. |
As a battle-hardened deal professional, you know few things are worse than missing an opportunity or investing financial and reputational resources in a transaction that is undone for political, regulatory or other noncommercial reasons. But how can you prepare for these nonmarket risks of U.S. foreign direct investment, or FDI? Don't worry. By asking these five questions, you'll be off to a fast, smart start to investing in the U.S.
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