As oil prices soar, Middle Eastern governments are exercising their growing clout by making deals around the globe — with a new political savvy.
Yesterday saw a burst of activity involving Mideast governments, including a battle between two Persian Gulf emirates over stakes in the London Stock Exchange and a bid by one of them for a stake in Nasdaq Stock Market Inc. A third emirate announced an investment in Carlyle Group, a Washington-based private-equity firm known for ties to political heavy hitters such as former President Bush.
The governments of the Persian Gulf — along with regional powerhouse Saudi Arabia — have seen their coffers swell to unprecedented size with rising energy prices and a regional economic boom. Yesterday crude oil topped $83 a barrel.
The deals mark a new level of engagement by an emerging group of Arab states whose leaders are generally friendly to the West and are eager to make a mark in global finance. The influence of countries such as Dubai and Qatar has grown even greater in recent months because, thanks to their cash, they are immune to the debt-market troubles that have frozen some other investors.
Four of the eight largest government-controlled investment authorities are from the Gulf, and the Abu Dhabi Investment Authority tops the list with assets estimated at $875 billion, according to Morgan Stanley. That’s more than triple the size of Calpers, the California pension fund.
Middle Eastern firms and funds shopping around the globe have spent $64 billion so far this year, compared with $30.8 billion in all of last year and $4.5 billion in 2004, according to Dealogic. Acquisitions in the U.S. and Britain account for slightly more than half of the total this year.
“The deep pools of capital in the Middle East are increasingly affecting all aspects of global financial markets, both private and public,” says Monte Brem, chief executive officer of StepStone Group LLC, La Jolla, Calif., which advises Middle Eastern institutions on their international investments.
That frenetic pace could continue as oil revenues climb along with oil prices. Crude-oil futures ended at their fourth record high in a row Thursday, in nominal terms, as fears renewed of an approaching storm in the Gulf of Mexico.
Some of the Middle Eastern investment funds have long histories, such as those of Abu Dhabi, Kuwait and Saudi Arabia. But newer investment authorities set up by Qatar and Dubai have made most of the waves in global markets recently by carrying out aggressive bids for stakes in well-known targets such as Nasdaq.
Middle Eastern countries are becoming more sophisticated at heading off potential backlash from high-profile deals, especially in the U.S. They have learned from the firestorm last year that forced a Dubai-controlled company to sell the U.S. port operations of a British company it had acquired. China, which also combines deep pockets of foreign reserves with a shaky standing in Washington, left another lesson when one of its government firms tried unsuccessfully to purchase the U.S. oil company Unocal.
Dubai, which is seeking a minority stake in Nasdaq, asked the Bush administration to vet the deal upfront for potential national-security issues. It hired a team of Washington lobbyists and strategists to reach out to officials in the administration and Capitol Hill a day before the proposed deal became public, according to people familiar with the situation.
While President Bush promised a careful review of the deal, a key legislator, Democrat Barney Frank, said it “doesn’t raise any alarm bells to me.” Rep. Frank, who is chairman of the House Financial Services Committee, noted Nasdaq is a highly regulated entity and “there’s no physical transfer of property” in the proposed deal.
The Nasdaq deal is part of a larger battle between Dubai and Qatar for control over parts of world stock exchanges. Dubai, part of the United Arab Emirates, is the flashier of the two. Nearby Qatar is a tiny country that controls the world’s third-largest gas reserves.
Apart from Nasdaq, the other two stock exchanges involved in the maneuvering are London Stock Exchange Group PLC and a company called OMX AB that operates stock exchanges in Sweden, Denmark, Finland, Iceland and Baltic countries.
Dubai’s stock exchange agreed to a deal yesterday under which it will take a 19.9% stake in Nasdaq and buy a 28% stake in the London exchange from Nasdaq. The deal would also result in Nasdaq owning OMX.
Just as it seemed Dubai had locked up an alliance with leading exchanges in the world’s top two financial capitals, Qatar moved in with an apparent bid to upset it. Qatar spent $1.36 billion in a matter of hours before the market opened to buy 20% of the London exchange. It also spent $470 million during trading hours to buy 10% of OMX.
Officials representing Qatar said the country is looking for long-term investments in a variety of industries. Three Delta, a fund backed by the Qatar Investment Authority, says it is principally focused on acquiring companies in the United Kingdom, and it aims to support existing management at the companies it buys.
The Qatari investment fund has also offered to pay $21 billion for British supermarket chain J. Sainsbury PLC. The fund has hired Tony Campbell, the former deputy chief executive of Wal-Mart Stores Inc.’s British division, to become nonexecutive chairman of Sainsbury if its takeover is successful.
Other big sovereign funds from the Middle East and Asia have said they are looking for undervalued brand-name businesses. A Dubai investment firm bought a big stake in DaimlerChrysler AG when the big German auto maker was suffering from quality problems at its Mercedes-Benz division. It sold the stake after a year, doubling its money. The same firm, Dubai International Capital, bought Tussauds Group, the U.K. museum and entertainment company, but later sold most of it to private-equity firm Blackstone Group.
Gulf governments have also been active in the U.S., buying Manhattan real estate and other assets. Yesterday, an investment arm of the Abu Dhabi government known as Mubadala Development Co. announced it reached an agreement to pay $1.35 billion for a 7.5% stake in Carlyle Group.
The parties in that deal also showed awareness of political sensitivities. Before the deal was announced yesterday, Carlyle notified key players in Congress and the U.S. Treasury “as a courtesy,” said Carlyle co-founder David Rubenstein.
While neither Mubadala’s investment in Carlyle nor the Chinese government’s investment in the Blackstone Group is subject to official U.S. government review, remarks from senior U.S. Treasury officials have led to fears of a possible backlash against investment from the sovereign wealth funds. “We tried to send a message to the markets and to the regulators that we have no desire to participate in Blackstone’s management or have control,” said Jesse Wang, a senior official of China’s State Administration of Foreign Exchange, speaking at a Federal Reserve Bank of San Francisco seminar earlier this month. “But we got feedback that people still worried about our motive.”
Meanwhile, as Blackstone’s share price fell, the deal was heavily criticized within China. Mubadala clearly absorbed lessons from the Chinese experience with Blackstone. Carlyle gave Mubadala assurances that if — or most likely when — Carlyle goes public, Mubadala will be compensated if the valuation is lower than today’s valuation.
The battle between Qatar and Dubai for a piece of Western stock exchanges is part of their jockeying to become the premier financial center in the Middle East. Ten years ago, when Dubai wasn’t much more than a port with a single business thoroughfare in the desert, such ambitions would have been dismissed as laughable.
President Bush said yesterday that Dubai’s proposed transaction for a Nasdaq stake will come under formal scrutiny by his administration. “We’re going to take a good look at it, as to whether or not it has any national security implications,” Mr. Bush told reporters. “I’m comfortable with the process to go forward.”
Lawmakers on Capitol Hill said they would closely monitor the deal. Such reviews are carried out by the Committee on Foreign Investment in the U.S., or CFIUS, a government panel led by the Treasury Department.
Even before the president’s statement, Nasdaq and the Dubai side had signaled to policy makers that they wanted a U.S. review.
New York Democratic Sen. Charles Schumer, a leader of opposition to the Dubai ports deal, was among the first to receive a briefing when representatives of Dubai and Nasdaq went to Capitol Hill this week.
The senator voiced skepticism, warning in a letter to the Treasury Department that the deal “would result in a foreign government having a large influence on the decisions made by a critical part of the U.S. economic infrastructure.”