(FORTUNE Magazine) – THE FOREIGN ACCENT in the U.S. takeover game is bound to get heavier in the next few years. Increasingly aggressive and sophisticated international companies are spending freely -- some would say wildly -- for big pieces of American industry. So far, returns have been meager, but foreign buyers have more on their agenda than short-term profits. As their influence grows, they could bring some lasting changes to the American mergers and acquisitions market. Foreign buyers represent a new kind of acquisitor. Unlike leveraged-buyout artists, they are less interested in big, cash-rich companies loaded with plodding divisions that can be sold to pay off debt. Says Ryuuji Kitamura, senior vice president of C. Itoh, a Japanese trading company that has made numerous U.S. acquisitions: ''We don't sell our babies to pay the bills. Breaking up companies is not our way.'' Instead they try to advance strategic goals. The companies they seek are likely to be smaller, lesser-known firms whose acquisition can round out a global market position, add a U.S. plant, or provide access to new technology or a strong brand name. When foreign buyers find a company that fits, they go for it regardless of price. Many have paid what American counterparts would regard as too much. As their influence on Wall Street grows, foreigners may change the way American investors value companies. The emphasis could shift from cash flow and breakup value -- the popular determinants of worth now -- toward more strategic considerations. The definition of a hot takeover stock could change too, with small biotech and semiconductor companies held in higher esteem than % giant breakup candidates. If foreigners keep paying inflated prices, though, they could drive up stakes for all acquirers and reduce returns. That's good news for shareholders, who can expect ever higher bids for their stock; bad news for CEOs hoping to expand through acquisition. American companies could increasingly find themselves priced out of the market. Foreign takeovers are still small in comparison with the billions spent by U.S. companies to gobble each other. In 1988 foreigners accounted for less than 20% of all U.S. deals. But that is sure to rise as the Japanese continue their shopping spree. Japanese exporters are eager to shift production to the U.S. to counter protectionist sentiments and because the strong yen makes America a lower-cost place to manufacture. U.S. acquisitions by Japan are already way up. In 1987, the latest year for which hard numbers are available, there were 146 deals, more than double the year before. Last year, according to estimates, the number was nearly 200. The foreign share could grow even more if Congress decides to curtail domestic takeovers. One popular proposal to curb LBOs would reduce the deductibility of interest on takeover debt (see Politics & Policy). That could make many deals uneconomic for American buyers, but would leave the field wide open to foreign bidders, since most could continue deducting interest charges in their own countries. It's hard to prove that foreigners pay too much, since they often acquire private companies. But investment bankers who work on their deals say the prices are often excessive. Says Peter Rona, president of IBJ Schroder Bank & Trust, a New York-based subsidiary of Industrial Bank of Japan, which has participated in dozens of international deals: ''In the 1980s foreigners have significantly overpaid for acquisitions.'' The surest indication of foreigners' largess is in the shockingly poor returns they have earned on their U.S. investments in recent years. During 1987, not an atypical year, the return on direct foreign investments in U.S. assets amounted to no more than 5% on average, according to statistics compiled by the Commerce Department. That's well below what American investment bankers would consider a competitive return. Of the six groups Commerce studied, the Japanese did worst, earning less than 4%, while the British did best, earning 6.7%. The Continental Europeans averaged a return of 5.4%. DESPITE SUCH abysmal results, foreign companies will forge ahead and even pick up the pace of acquisitions. Siemens, the West German electronics giant, has made over 30 acquisitions in the U.S. but has yet to turn a profit. Says Hans Decker, president of the U.S. subsidiary: ''Sure my company is not happy that we aren't making money from our U.S. holdings. But we are taking the long-haul view -- we must.'' Siemens has stated that it will continue to be an aggressive acquirer of American assets in the years ahead. Such a profits-be-damned approach could lead American companies to overbid in making acquisitions of their own. General Electric bought Borg-Warner's chemical business last September for $2.3 billion, an amount rumored to be beyond what Borg-Warner thought it could get. The reason for GE's generosity, investment bankers say, was that it was bidding against an aggressive group of companies, including a number of foreign firms. ''GE wanted to make sure that foreign interests did not get into this particular segment of the market,'' says one banker. Borg-Warner's chemical division is the world's leading producer of ABS resins, used to make plastics for home appliances and automotive components, and a good fit with GE's fast-growing plastics business. Many industries that foreigners have their eyes on are also the most promising for American companies. Siemens has identified five high-growth areas where it will continue to acquire: factory automation, office automation, telecommunications, semiconductor technology, and diagnostic medical equipment. In December, Siemens peeled off $844 million of its war chest of $10 billion in cash and marketable securities to buy the manufacturing arm of ROLM, a maker of computerized private telephone systems, from IBM. One reason foreigners make such generous bids for U.S. companies is that they assess the value of a takeover target differently than Americans do. In the U.S., managers determine the price of a potential acquisition either by discounting projected cash flow to arrive at a present value or by looking at the cash flow multiples that similar companies in the same industry have sold for. While these methods can result in pricey deals too, especially when egos get involved, they generally are grounded in reality, since the cash flow from the acquired business must be sufficient to service the debt used to make the acquisition. Foreign buyers, especially the Japanese, tend to skip such calculations. They want to know what the target company can do for them in the long run, how it augments the marketing plans they have already made. Says Peter G. Peterson, a former Secretary of Commerce and now chairman of the Blackstone Group, an investment bank that has handled some of the biggest Japanese deals: ''Once they decide to buy a particular company, they are less likely to be deterred by price.'' Sometimes, he adds, ''we have to tell our clients: 'Look, you're paying more for this company than an American company would pay.' ''

When foreign competitors duel each other for a U.S. company, the bidding can quickly reach astronomical proportions. Says Claus Moehlmann, a managing director of First Boston who specializes in international acquisitions: ''What you have are the best players worldwide looking to round out their global positions. They all go after the same properties.'' Bridgestone's 1988 acquisition of Firestone is a prime example. The Japanese tiremaker entered the bidding after Pirelli of Italy made an initial hostile tender of $58 a share. The stock had been selling for around $35. Fearing that a large part of the huge American tire market would fall into Italian hands, Bridgestone countered with $80 a share, 38% higher than what Pirelli had bid. Not surprisingly, Bridgestone won. The reaction among analysts and investment bankers familiar with the deal was unanimous. Says one: ''There's no question that Bridgestone paid too much.'' Premium pricing is not limited to the Japanese. Campeau Corp. of Toronto bought Allied Stores for 25 times earnings in 1986, when the average multiple for such deals was 16. Last December, British publisher Robert Maxwell paid $90 a share for Macmillan, which was 40 times earnings and 539% of book value. Grand Metropolitan, the British food and liquor company, took over Pillsbury at the beginning of this year with a bid of $66 a share. Says James Murren, an analyst at C.J. Lawrence Morgan Grenfell, the New York subsidiary of a London securities firm: ''You won't find anybody outside of a few Pillsbury employees who think that company is worth even $60 a share.'' Part of the reason foreign companies can afford to pay so much is that they live by different accounting rules. Take the matter of goodwill, defined as that part of the purchase price that exceeds the market value of the assets acquired. If an American firm acquires another company, goodwill must be written off against income over a maximum of 40 years, producing a drag on earnings per share. IN BRITAIN companies are able to write off goodwill against shareholders' equity, where it does no damage to earnings per share. Further, the acquiring company can prevent any potential damage to shareholders' equity by doing a ''rights offering'' prior to the buyout. The rights offering is an offer to sell additional stock to existing shareholders, usually at a discount, if the acquisition goes through. By this approach, the loss to shareholders' equity from the goodwill charge is mended by an additional input of new equity. Last October, Grand Met issued an $830 million rights offering in anticipation of its bid for Pillsbury. If an American company had acquired Pillsbury at the price Grand Met paid, it would face an annual charge against earnings of around $50 million for goodwill for each of the next 40 years. Or consider another foreign buy: Unilever's 1987 acquisition of Chesebrough-Pond's. If an American firm had paid Unilever's price of $3.1 billion for this big consumer products company, the annual charge against earnings for goodwill would have been as much as $60 million a year for 40 years. Such charges would be sure to evoke the wrath of security analysts and shareholders. Some countries on the Continent don't recognize goodwill at all. Others permit several ways of disposing of it quietly, including shunting it to the shareholders' equity account as the British do. Even if a charge for goodwill does make it to the profit and loss statement, as is possible under West German accounting rules, it does not cause much of a stir since investors have a relaxed attitude toward financial reports. Says one European investment banker: ''Shareholders here live in a sleepier world.'' Lack of investor scrutiny, bankers say, gives European companies tremendous leeway to bid aggressively. The rules give an accounting edge to the Japanese too. Typically their acquisitions are carried on the balance sheet at cost, so goodwill is not recognized. If an acquisition should crimp earnings per share for any other reason, it would hardly matter. Says C. Itoh's Kitamura: ''You won't even find earnings per share in most Japanese shareholder reports. Investors just don't care about it.'' In short, what can be a huge problem for American companies is no problem for foreign bidders. Says Jeffrey Rosen, co-head of international mergers and acquisitions at Wasserstein Perella, a New York investment firm: ''There's no question that accounting gives foreign acquirers a big advantage over American companies. It also helps justify some deals that couldn't be justified on an earnings-per-share basis.'' Many foreign acquirers also enjoy a significantly lower cost of capital, which allows them to accept a smaller return on overseas investment. Because Japanese interest rates are around 5%, companies can afford a higher offering price than American bidders tied to the prime rate, currently 10.5%. Japanese companies can also issue convertible bonds, which yield only 1.5%, further reducing their cost of capital. NO INDUSTRY has been of greater interest to foreigners in recent years than chemicals. Foreign companies now own 32% of the industry's assets. The international slugfest began in 1985. Imperial Chemical of Britain paid what was then a fat 19 times earnings for the chemical division of Beatrice Foods. Later in the year BASF bought United Technology's Inmont chemical division, a leading producer of ink, for an equally rich price/earnings multiple. Most recently Reichhold Chemicals was acquired by Dainippon Ink & Chemicals of Japan in a pricey -- and hostile -- takeover. The auto industry is about to become a hotbed of takeovers. No, nobody is going after General Motors. But investment bankers at Nomura and other Japanese firms are scouring the U.S. for parts suppliers. Cars account for 36% of the U.S. trade deficit with Japan. Peterson of the Blackstone Group believes the Japanese really want to whittle down their surplus, and to do that they will push for U.S. automotive acquisitions. Says he: ''In order for the manufacturing component of the trade deficit to turn, there is going to have to be a major turn in the automotive sector. That means foreigners will have to produce more cars and more parts in the U.S.'' For the Japanese, of course, increasing U.S. production is also good business. The strong yen makes it more profitable to build cars in America than import them. And as the Japanese increase production they will want to own more of their suppliers. The weakening semiconductor industry also ranks high on the shopping list of foreign buyers. In addition to Siemens, other globally minded technology companies are eager to acquire a worldwide presence in chip manufacturing. Here, too, many of the suitors will be Japanese. Their timing is good. After some boom years, the industry is entering a flat period. The big premium in price/earnings multiples that semiconductor stocks once had has vanished. Smaller industries, like paints and adhesives and test and measuring devices, are fertile ground for foreign incursions as well, investment bankers say. But none will attract as much attention as biotechnology. The Japanese in particular are hungry for biotech breakthroughs -- and the patents that go with them. Analysts expect that many struggling, cash-short American biotech firms will command some of the richest takeover premiums in the years ahead. Foreign buyers will continue to avoid giant diversified companies. While a few, such as Britain's Hanson PLC, occasionally go for such targets, most foreign buyers, especially the Japanese, have a strong preference for pure plays where they can buy the business and keep all the parts. Nor will Japanese buyers become big players in the hostile bidding war. Though they will sometimes consider roughhouse tactics to land their prey, most are still far from following Dainippon Ink & Chemicals' successful raid on Reichhold Chemicals. Says Blackstone's Peterson: ''It's just not their way to do unfriendly deals.'' CORPORATE AMERICA'S debt binge could produce another group of tantalizing takeover candidates, those infamous so-called stub stocks. Foreign firms are keeping close tabs on these companies, which have undergone leveraged recapitalizations that resulted in large payouts to shareholders, huge debt, and just a ''stub'' of public ownership left. Many of these companies will be sorely in need of an equity injection when the next recession hits. Says Moehlmann of First Boston: ''Foreign firms are hoping to pick up those companies at a very good price.'' Such unabashed acquisitiveness by foreigners may grind against the nerve of American nationalism. But as long as Americans continue to overconsume, there will be a need for foreign capital. To the extent that such a need exists, it is far better to get those infusions in the form of risk-sharing equity capital rather than still more debt. What's more, foreign capital is helping to rebuild America's industrial base. Many foreign acquirers are following up their acquisitions with additional capital to refurbish outdated plants and equipment. Bridgestone, for example, will invest $1.5 billion to modernize and expand Firestone's facilities. The foreign takeover frenzy may bring a less tangible but no less important benefit. The willingness of foreign managers to accept substandard returns from their American investments in favor of longer-term strategic considerations is a risk that may or may not pay off. But to the extent that such a long view prompts American managers to be even a little less obsessed with short-term performance and a little more concerned with their company's long-range competitive position, it may turn out to be an unexpected dash of good fortune for American industry.

CHART: NOT AVAILABLE CREDIT: SOURCE: U.S. DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANALYSIS. CAPTION: WHAT FOREIGN COMPANIES OWN IN THE UNITED STATES

CHART: NOT AVAILABLE CREDIT: SOURCE: MORGAN STANLEY & CO. CAPTION: MAJOR FOREIGN ACQUISITIONS OF THE 1980s

CHART: NOT AVAILABLE CREDIT: SOURCE: BUREAU OF ECONOMIC ANALYSIS, U.S. DEPARTMENT OF COMMERCE CAPTION: FOREIGN EARNINGS ON U.S. INVESTMENTS The price of overpaying: When foreign companies went on a buying binge in the 1980s, their returns began to slip.