Britain Takes the Crown for Foreign Investing in California

Forgive the Brits if they seem a bit smug about having quietly overtaken Japan as California’s leading foreign investor.

After all, they stoically endured years of pronouncements that they were passe, that the Golden State’s future lay to the West and South, that the millennium would usher in a Pacific Century with Tokyo and Beijing at the helm.

Those declarations are being made with less certainty since Asia’s economy cooled and Britain emerged as the driving force behind a global mergers-and-acquisitions wave that has made Britain, always a leading U.S. investor, a power player in everything from Hollywood movies to Silicon Valley wireless technology.

It was Vodafone Group’s $62-billion purchase of San Francisco-based AirTouch Communications and BP Amoco’s $27.8-billion marriage with Atlantic Richfield Co. that pushed Britain ahead of Japan last year in California, according to the British Consulate in Los Angeles.

U.S. government data still show Japan as California’s top foreign investor, a position it has held for more than a decade. But Britain’s 1999 megadeals alone amounted to more than twice as much as Japan’s entire California portfolio, which measured $34 billion in 1997, the last official tally.

“It probably was a mistake to declare this the Pacific Century,” said Anthony Giddens, a prominent British social theorist and director of the London School of Economics and Political Science. “I’d say it is more of a Global Century. I think it’s quite possible that Central Asia and Europe will end up more important than the Pacific region.”

Whatever title history bestows upon this century, California is sure to remain a major partner across the Pacific Rim, given the state’s long and fruitful ties to Asia and Latin America.

Indeed, while Britain emerged the leader on the investment side, it was Mexico that eclipsed Japan as California’s top trading partner earlier this year, a reflection of the strength of the North American trading bloc. Britain ranks sixth on the trade chart.

Lon Hatamiya, California’s trade secretary, remains confident that Asia will make a comeback, particularly when the Japanese economy recovers and China enters the World Trade Organization. But the state, recognizing California’s increasingly global allure, is also expanding its economic outreach in Latin America and Europe.

“We’re at the cutting edge of the new information-based technology, and everybody wants a piece of that,” Hatamiya said.

While nasty spats over bananas and beef have dominated transatlantic trade relations lately, commercial ties between the United States and all of Europe have increased in the past two years as the continent has opened up its economies, adopted a common currency and become more globally competitive. In the process, German firms have become bigger players in Hollywood, and the French, through Vivendi’a purchase of Seagram and its Universal Studios, are becoming a big presence in entertainment here.

‘You Can’t Ignore California’

But it is the economic interdependence between the United States and Britain that has increased most dramatically.

In 1999, British firms spent $243 billion on foreign purchases, making them the world’s top exporter of cash, stock and other securities. Of that, $135.8 billion was invested in the United States, the bulk of which ended up in California. By comparison, despite a strong dollar, Americans put just $45.5 billion into 317 deals in Britain.

“You can’t ignore California, the world’s sixth-largest economy,” said Andrew Kane, a British expatriate and managing director in accounting giant Arthur Andersen’s Los Angeles office. “A lot of British companies had historically been investing in the East Coast, and now they’re extending to the West Coast.”

Jeffrey Gersick, the London-based director of California’s European trade office, said concerns over the sagging euro have soured many Brits on closer ties with their European neighbors. Britain belongs to the 15-member European Union but has not yet adopted the euro, the regional currency now used by 11 European countries.

Britain has been a leading U.S. investor since the dawn of this nation, investing heavily in the Colonies before 1776 and then providing much of the know-how and capital used to construct the fledgling nation’s railroads, banks and steel mills.

Thanks in large part to this long history and a common language, the latest British monetary influx has barely caused a ripple in the U.S.--a striking contrast to the 1980s, when Japan’s high-profile real estate purchases triggered a protectionist backlash. The British have softened the impact by diversifying their portfolio, buying up everything from ice cream manufacturers to small software firms.

“We see great opportunities for synergies between U.S. and U.K. firms,” said David Butler, president and chief executive of Sage Software Inc., an Irvine producer of accounting software purchased by the London-based Sage Group in 1998. “The [common] language makes it very straightforward and easy to manage.”

When the British-American Business Council, the leading transatlantic group, holds its annual meeting in Los Angeles next year, the focus will be on how British firms can build Los Angeles’ prominence as a global hub, according to Jeremy Davies, a BABC executive and managing partner at PricewaterhouseCoopers. Under Prime Minister Tony Blair’s direction, British officials are mining the California connection. The British government, which established a film office here in 1997, has dispatched a marketing official to sell the nation as a production site and talent location. The University of Glasgow has opened an office in Silicon Valley.

“We’ve been reminding people of the assets that the U.K. offers in economic terms for many years, but perhaps the audience here has been listening more closely in the last two or three,” said John Houlton, outgoing director of the British Film Office in Los Angeles.

Of course, influence from the British Isles is hardly new in California. William Mulholland, an Irish-born engineer, helped carve Los Angeles out of the desert, and Britons such as Charlie Chaplin and Alfred Hitchcock were prominent in Hollywood’s creation.

Lured by Promise of Sunshine, Jobs

After World War II, unemployed British aerospace workers brought their families to the United States, joining California companies such as Northrop Corp. and Douglas Aircraft. Others followed during Britain’s lengthy postwar recession, lured by the promise of sunshine and jobs.

In the years that followed, homesick Brits looking for a place to play whist or cricket or share a pint with friends formed 85 clubs in the Los Angeles area. At its peak in the late 1960s, the Mayflower Club of North Hollywood boasted 10,000 members and sponsored several charter flights a year to England.

As the expatriate population ballooned to more than 500,000, British firms soon followed, either setting up subsidiaries in California or purchasing well-known American names. British Airways, Rolls-Royce, Allied Domecq, owner of Baskin-Robbins USA, and Peninsular & Oriental Steam Navigation Co., owner of Princess Cruises, all have major operations in the state.

More recently, California’s technology and entertainment industries have attracted the attention of British powerhouses such as Carlton Communications, owner of Camarillo-based Technicolor, a film processor and one of the world’s largest producers of videocassettes, CDs and DVDs, and the EMI Group, parent of the Los Angeles-based Virgin and Capitol Records groups.

Nigel Sinclair, co-chairman of Intermedia Films, the producer of “Sliding Doors” and “Clay Pigeons,” described the British Airways London-Los Angeles flight as a “commuter shuttle” for at least 1,000 film executives. They include such directors as Tony and Ridley Scott of Shepperton Studios and Tim Bevan and Eric Fellner, founders of Working Title Films.

“Now England is perceived as not just a source of niche eccentric programming with the odd breakout actor but as a natural extension of Beverly Hills and Hollywood,” said Sinclair, whose company is co-headquartered in London and L.A.

Not all of these transatlantic marriages have thrived. In 1988, Dawson Holdings, a major British magazine distributor, began acquiring controlling interests in several U.S. software and publishing outlets, including EOS International, which produces library software. Last year, the British firm decided to shift focus and began selling off its U.S. holdings.

Scott Cheatham, EOS co-founder and president, said Dawson’s surprise turnaround “leaves us a little bit out on a limb” and uncertain about the future. But he still views his British partnership as positive because it helped the small Carlsbad-based firm develop a foreign market that now accounts for 20% of its revenues.

“There’s no doubt about it, our international experience gives us a different view of the world economy,” he said.