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THE HOWS AND WHYS

What’s behind this phenomenon? For one, the dollar’s decline has made U.S. assets a relative bargain. Pressure on the U.S. financial sector, meanwhile, has made it more difficult for large private equity firms to fund deals, and that has opened the door for cash-rich buyers from other parts of the world, which is, according to Goldman, “where capital is being generated.”

The global economy grew by about 4.9% in 2007, according to projections by the International Monetary Fund. Advanced countries grew about 2%, while the developing world outperformed. China set the pace with 11.2% growth, with India a close second at 9%. Rising prices for oil and other commodities helped fuel the growth. Regulatory changes in regions such as China and Russia have helped create a middle and upper class, which has attracted investment.

“The flow of capital over the last three decades shows it will go where the opportunity is. Excess money is being generated in many parts of the world where it has never been generated before, and smart people are looking to deploy it,” Goldman says.

Regional forces are also driving M&A. In India, multinational corporations such as Tata Group, which has been remarkably aggressive in the M&A market, are looking to the West for exportable brands and focusing on a range of sectors from steel to autos and hotels. Last December, for instance, Tata emerged as the winner in the auction of Ford’s Jaguar and Land Rover luxury brands, with a bid of about $2 billion. In 2006, it closed a $13 billion acquisition of Corus, a British steel company. Similarly, in early 2007, the Taj hotel company of India took over the Ritz-Carlton in Boston.

In China, M&A deals are largely driven by the country’s need for resources and know-how, not an interest in buying Western brands. The Lenovo deal included rights to the ThinkPad brand, but Lenovo was quick to drop use of the well-known name as soon as it was able to — three years ahead of schedule. Deals are instead focused on crucial areas such as mining, with Aluminum Corp. of China’s $14.4 billion bid for British miner Rio Tinto Group the largest example to date.

Chinese companies and government-backed investment funds also are making investments in other parts of the developing world, particularly Africa and the Middle East. In October, the Industrial and Commercial Bank of China, China’s largest bank, invested $5.5 billion in the Standard Bank of South Africa — a bet on rising growth and standards of living in sub- Saharan Africa. The 20% stake was the largest direct foreign investment in the history of South Africa. More deals are likely. ICBC is the largest bank in the world, with a market cap of $319 billion. It recently raised $22 billion in listings in Hong Kong and Shanghai, giving it plenty of capital for investments around the globe.

In Latin America, multinational corporations are looking abroad for brands as well. In 2004, Brazilian brewer Companie de Bebidas paid $7.25 billion for Interbrew, the maker of Canada’s iconic Labatts brand. “There have been tremendous changes in the last 10 years. Companies have evolved from being regional players to truly global companies,” says Julio de Quesada, WG’76, Managing Director of Grupo Financiero Banamex, Mexico’s second-largest bank. Banamex, based in Monterrey, Mexico, is owned by Citigroup. Quesada recently led a delegation of Mexican corporations to China in an effort to expand trade between the two countries, a sign of Mexico’s emergence as more than just a regional economic player.

Latin American companies also scour the global market looking for efficiency. Tortilla maker Gruma recently became the first tortilla maker in China, opening a manufacturing plant in Shanghai. Grupo Bimbo, the Mexican baker, has made acquisitions in Texas and Argentina. And Monterrey-based cement giant Cemex closed its $16.7 billion acquisition of Australian construction products company Rinker in July.

“It’s a truly global world, now. I was recently on vacation in Egypt, and I could see the Cemex trucks on the street. I have seen them in Southeast Asia as well,” de Quesada said.

In the Middle East, deals are often driven by the need to invest oil profits and to diversify beyond the oil industry itself. For example, Kuwait Petroleum in December said it would pay $6 billion for five Dow Chemical units, a logical extension of its oil business. In 2006, Dubai Ports paid $6.8 billion for British transportation company Peninsula and Oriental Steam Navigation Co.

For investment bankers reeling from the implosion of the credit markets, this emerging M&A market has created a growth opportunity. While global M&A deals fell 28% in the U.S. in January, according to analyst Meredith Whitney of Oppenheimer & Co., U.S. M&A activity fell 54%. Yet deal volume in Asia, excluding Japan, rose 37%. And deal volume in Latin America soared 137%. That has created a boom for certain banks such as Citigroup, which has a strong presence in Asia and other emerging markets.