In a year marked by negative earnings and ominous forecasts, Círculo de Empresarios and the Wharton School have published the 2008 Yearbook on the Internationalization of Spanish Companies, an in-depth look at the presence of Spanish firms in the global economy. This year’s report, which follows up on trends already observed in 2006, notes that during 2007, Spanish companies recorded a significant number of cross-border mergers and acquisitions. They also increased their global diversification and signed a record volume of Foreign Direct Investment deals.
According to members at Círculo de Empresarios, the five largest Spanish business deals in 2007 were the following: The consolidation of ACS as one of the world’s largest construction companies following its purchase of shares in Germany’s Hochtief; the strengthening of BBVA in the U.S. market with its acquisition of Compass Bank; the global leadership of Iberdrola in the renewable energy sector as a result of its purchase of Scottish Power; Santander’s role in the largest bank acquisition in history with its purchase of Holland’s ABN-AMRO; and the expansion of Grupo Tecnicas Reunidas in the Persian Gulf, when that company was awarded an important contract with Boruoge in Abu Dhabi.
Nevertheless, things don’t look promising for companies in most regions of the world these days, and the Spanish economy, if it conforms to forecasts, could close the year in a recession. So, what reasons are there for optimism? Universia-Knowledge at Wharton spoke with two of the report’s authors — Maria Jesús Valdemoros, director of the economics department of Círculo de Empresarios, and Mauro F. Guillén, director of Wharton’s Lauder Institute — about the challenges and opportunities for Spanish companies during the storm.
UKnowledge at Wharton: In the Yearbook, you note that during 2007, Foreign Direct Investment by Spanish companies rose to €90.995 billion, up 44.2% from 2006. Given the economic and financial environment we’re in today, what are the globalization challenges facing Spanish companies?
Mauro Guillén: There are some investment projects that will have to be abandoned. There are also some companies that are having problems because they took on a great deal of debt in order to make investments over the past two or three years. They will have to restructure their debt, sell some assets, etc. Periods of crisis always have this sort of impact, but there are also opportunities and some companies are taking advantage of them. In every crisis, the price of assets falls, and if you are in a solid position compared with your competitors, you may be interested in making purchases. There is also another important opportunity: If the Spanish economy enters a period where growth is much slower than in recent years, globalizing through exports or foreign investments provides a cushion; a way of diversifying geographically. Crises are not only problematic; they also create opportunities.
UKnowledge at Wharton: What globalization strategies should Spanish companies pursue during the current changes in global economy?
M.G.: There are economies in the world that continue to grow and that probably will continue to do so. China is being very aggressive about maintaining its growth rate through a very significant fiscal stimulus program that will give great weight to infrastructure, so Spanish companies in this sector should position themselves [in China]. India is also going to continue to grow, and so will Brazil, although it has been affected. It [Brazil] appears to have a dynamic domestic market that continues to be robust, and it is possible that it, too, will continue to grow. Then there is the United States, the first economy that has gone into recession. Because of its flexibility, it could possibly be the first to get out of the crisis. So, there are many favorable things for Spanish companies positioning themselves in the U.S.: prices of assets are very low. The euro continues to be strong, although it has fallen a little with respect to the dollar. The U.S. economy is certain to be one of the first [economies] to recover. Investing in the U.S. nowadays makes sense. Generally speaking, you have to position yourself in markets that we know are going to have high growth in the future.
UKnowledge at Wharton: Experts at Círculo de Empresarios have singled out 2007 foreign deals involving ACS, BBVA, Iberdrola, Santander and Tecnicas Reunidas. Talk to me a little about these award-winning companies. What would you emphasize about each one of them? What challenges will they face in the short, medium and long term?
M.G.: These are deals of great scope – especially those involving Santander, BBVA and Iberdrola. They are also deals that, although they don’t have such a large investment volume, open new frontiers and new horizons for Spanish companies. For example, take the deal by Tecnicas Reunidas in the Middle East. That is a market where we are interested in having a presence; although some Spanish companies have been operating in that region since the 1960s, their presence is relatively small compared with other countries. The deal involving ACS with Hochtief has this advantage: The [latter] company has a presence in Eastern European countries whose economies are going to grow a great deal over the medium and long term.
The deals involving Santander and Iberdrola are qualitatively very different. In the case of Santander, that’s because it is the largest bank acquisition in history. In addition, that financial institution made out very well by selling the Italian part (of the business) at a profit over those two weeks, and it has managed to become the number-three player in Brazil. The Iberdrola deal is very important because it consolidates that company’s global leadership in renewable energy, and as one of the biggest utility companies in the world. Between this deal and the acquisition of Energy East in the U.S., which was approved in 2008, we are talking about a very significant strengthening of Iberdrola’s competitive position in the marketplace.
UKnowledge at Wharton: In the 2007 report, you noted that one of the biggest challenges for Spanish companies was their visibility in the international media. Do you believe that this has improved, and if so, why? Can you name some examples?
M.G.: According to the indicators in our report, [Spanish companies’] visibility in the global media has improved. This is important because Spanish companies need financing, which they achieve, to a great deal, via institutional investors and by issuing bonds and so forth. So the visibility, image and reputations that are being created for Spanish companies are very important [for them]. The companies that are attracting the most attention are the big ones: Endesa, Telefónica, BBVA, Santander, Repsol, etc.
But there is a second group of companies that are also a focus of media attention, such as Inditex (owner of Zara) in the textile sector, as well as certain sectors that are very much in style, such as technology with Gamesa, etc. This is a very positive trend that has been going on for the last ten years, and reached new heights in 2007. This is very important in the medium and long term.
The most significant examples are Santander and Iberdrola. In the latter’s case, it’s not just because of the deal for Scottish Power but also because of the public takeover offer by Iberdrola Renovables [the world leader in wind energy], and its emergence as the largest renewable energy company in the world. This point is worth emphasizing because you have to realize that Spain only produces 2% of the world’s GDP, so it is really noteworthy that its companies are number-one in this sector.
UKnowledge at Wharton: Generally speaking, what have been the main accomplishments of Spanish companies from 2006, when you put out your first report, through 2007?
María Jesús Valdemoros: In 2007, Spanish companies participated in the overall expansion of global Foreign Direct Investment, as money flows reached historic heights [their net investment grew 32.7%]. It should be emphasized that our companies have continued to diversify in terms of geography and sector, as you can see by their foreign investments in recent years. The most important destination for our foreign investments was the Netherlands, with 28.6% of the total; the total grew tenfold from 2006, basically because of the acquisition of ABN-AMRO, the Dutch bank. The United Kingdom came next, with 23.9%. The [30] countries of the Organization for Economic Cooperation and Development jointly captured 95.2% of net Spanish investment, and the 27 nations of the European Union took in 75.5% of it.
UKnowledge at Wharton: According to the data, Spain lags behind Europe in terms of productivity. What do you believe will be the trend in coming years? What suggestions can you make for solving this problem?
M.J.V.: The economic crisis has overtaken Spain, which has experienced the most rapid, intense and costliest growth in unemployment in all of Europe. [Currently above 11%, Spain’s unemployment rate could reach 12.5% in 2009, according to government forecasts.] From a purely statistical viewpoint, it will have a positive impact on indicators of aggregate productivity. That’s because jobs are being destroyed rapidly in sectors such as construction as well as in some services that provide a sizable portion of Spain’s GDP but suffer from low productivity and low rates of productivity growth. Longer term, Spanish productivity requires stimulus through the sorts of supply policies that facilitate a transition toward a new pattern of competitiveness. That is to say, our economy requires reforms that increase its competitiveness. Among the areas that require reforms are education, the energy sector, the labor market, and the system for science and innovation.
UKnowledge at Wharton: Do you believe that Spanish companies will continue the trend toward making more investments in English-speaking markets? Are Spanish executives prepared for this challenge, in terms of their knowledge of the culture and the [English] language? And how can Spanish companies tackle this obstacle?
M.G.: The volume of investment in the United Kingdom is due to the fact that there is little regulation there and it is easy to enter that country. These days, I believe that the U.S. offers a golden opportunity, and we are already starting to see movement. We continue to have a relatively small presence in China and an especially small one in India, an economy that is growing a great deal but which we have overlooked. I imagine that there will continue to be investment [deals] in the U.K. and in other countries in continental Europe, if they let us do them.
We have very good executives in Spain. The problem is not so much at the highest level but at the second level, where there is a shortage of talented people who can operate in the U.S., India and so forth. We are at a disadvantage with respect to other countries that are years ahead of us, training people who know those countries well and who speak their languages. But as I have said, I believe that the problem is more about the people below the top level — people who have to be in the trenches, doing business in those locations. Spain has an increasing number of well-prepared people but we lag behind companies in Britain, Germany, Sweden and elsewhere.
Short term, to get around these limitations of second-tier executives, companies will have to bring in executives from outside. Longer term, they will have to resort to internal training programs to attract young executives, train them, rotate them, and create managerial staff. That is the only thing that can be done. In Spain, universities don’t produce that sort of person, so companies have to take the initiative — especially, larger companies.
UKnowledge at Wharton: Please talk about the phenomenon of multinationals that have their roots in emerging countries. Why is the number of such companies growing? Will we continue to see this phenomenon in the near future? How much importance does Latin America have in this regard?
M.J.V.: There is no other reason beyond the development and economic growth of those [emerging] countries themselves. Consider that fifteen years ago nobody could imagine that we would now find Spanish multinationals operating in practically the entire world. Our growth, along with [global] economic deregulation, made it possible and necessary [for Spanish companies] to go abroad. Something similar has happened in the so-called emerging nations, especially Asian ones, which have grown at the fastest pace and are more integrated into the global economy. The presence of these countries’ multinationals will continue to grow at the same pace as their economies expand. In Latin America, you can find some of the biggest transnational companies of any emerging nations — especially those companies whose countries of origin are Mexico (Cemex, América Móvil, Teléfonos de Mexico, etc.) and Brazil (Petrobras, Companhia Vale do Rio Doce). Because their economies are the most dynamic in the region, their companies can play more of a leading role.
UKnowledge at Wharton: In your opinion, what will be the role of emerging and developing countries in the current global economic and financial crisis? What is your opinion about the theory of “decoupling?”
M.J.V.: There are some doubts about the validity of the theory of decoupling. I believe that these doubts arise because of the way we understand that term. If, by “decoupling,” we are referring to a certain independence of the economic cycles of developed economies, this theory is valid, at least for economies such as China, which are growing at higher average rates [than developed countries are] during the global recession. I believe their strong performance can contribute to softening the impact of the crisis, although there is no way that it will prevent a recession [from occurring] in the developed countries.
UKnowledge at Wharton: Finally, do you believe that during the coming months and years we are going to see an overall increase of protectionism?
M.J.V.: Without doubt, there is such a danger. At least, that is the conclusion that you have to make based on other crises in the past, which led to policies that hinted more of protectionism [than current policies]. Nevertheless, I believe that this [sort of protectionism] will not materialize. Although problems undeniably exist, the positive experiences of the last 50 years show that the right road to follow is to open the global economy and integrate it [more fully]. At the recent G-20 summit in Washington, the heads of state recognized that fact. Their commitment to free trade and to free markets appears to be serious; I believe — and I also hope — that their resolve [to do so] will not be broken.
