Corrected: Cross-border mergers defy U.S. slump

The head office of ABN AMRO bank is seen in Amsterdam in this May 29, 2007 file photo.

(Corrects location of Ernst & Young partner to Dallas, instead of New York, in paragraph 4)

By Jessica Hall

PHILADELPHIA (Reuters) - Even as tight credit conditions curb the urge among U.S. dealmakers to go shopping, the international mergers and acquisitions market is setting records.

Multinational corporations have been expanding into emerging markets, while foreign companies are using stronger currencies to pursue acquisitions -- especially in the United States.

So far this year, cross-border deals have reached a record high of $1.47 trillion, up 82 percent from the same period in 2006, according to research firm Dealogic.

"The value of the dollar, and the credit situation, are going to have less impact on these types of deals," said Mike Rogers, a partner in Ernst & Young's transaction advisory services group in Dallas.

When multinational companies need a foothold in a new market to gain access to new customers or cheaper manufacturing costs, the fluctuations of the market tend to play a small role in those decisions, he said.

"Regardless of where the dollar trades," Rogers said, "if a company has a China strategy and they need a presence there, they are going to have to pursue it."

Just this week, a group led by Royal Bank of Scotland (RBS.L) completed the $99 billion purchase of Dutch bank ABN Amro in the largest cross-border deal since wireless telephone company Vodafone Group's (VOD.L) $172.2 billion purchase of Mannesmann AG in 1999.

The ABN Amro deal helped put the financial industry in the top spot this year in terms of money paid for cross-border acquisitions, while the technology sector had the highest number of individual transactions, Dealogic said.

The biggest technology deal was Nokia's $8.1 billion bid earlier this month for U.S.-based digital map supplier Navteq NVT.N.

U.S. ALLURE

"The weakness of the dollar has made U.S. assets very, very attractive," said Greg Peterson, partner with PriceWaterhouseCoopers transaction services group in New York.

In fact, the United States has been the most-targeted nation this year, with the United Kingdom being the most aggressive international shopper. Cross-border deals involving U.S. companies totaled $536.6 billion, up 61 percent from 2006, Dealogic said.

Even so, a study released this week by Ernst & Young found that 83 percent of companies are eyeing deals in emerging markets, including Brazil, Russia, India and China.

Besides corporate buyers, private equity firms such as Kohlberg Kravis Roberts & Co. KKR.UL have raised funds dedicated to investments in Asia and other markets over the past year.

The bulk of cross-border deals are all-cash, Dealogic said, with only 20 percent using stock or a combination of stock and cash.

Such deals also tend to be smaller and therefore less vulnerable to market conditions, Rogers said.

"A $25-to-$30-million deal is a big deal in India," he said, "but for a multinational U.S. or Western European company, it's not difficult to use existing cash on hand."

PARTNERSHIP SOLUTION

One reason deals are smaller is that some transactions are partnerships or joint ventures. On Wednesday, Air France-KLM (AIRF.PA) and Delta Air Lines Inc. (DAL.N) announced a joint venture to share routes linking major U.S. cities and Europe.

"Often, international laws restrict a foreign company to owning a minority stake, with a local partner serving as majority owner," said an investment banker who requested anonymity. "The value of the investment can be small, but it can take twice as long to negotiate a $10 million deal abroad as it could to negotiate a $10 billion deal in the

U.S."

The success rate for cross-border deals in emerging markets is slim -- less than one-third of all such agreements actually close, according to the Ernst & Young study. The survey was based on conversations with more than 300 senior executives from 95 companies in 15 countries,

Among the challenges that emerging-market deals face are political uncertainty, lack of reliable financial information, complex regulations and cultural differences, Ernst & Young said.

International dealmaking can become entangled with global politics. China Construction Bank on Wednesday said it had been frustrated by the United States in its attempts to expand there and therefore was not interested in buying into investment bank Bear Stearns BSC.N.

The Chinese bank said its country had opened its market to banks from the United States and elsewhere, but it had hit roadblocks when trying to open a branch in the U.S.

"There's still a certain aspect of politics in the U.S. that has a protectionist bent," Peterson said. "A U.S. company should be able to acquire anything anywhere, but when it's in your backyard, the feeling can become different."