Foreign Outfits' Slim U.S. Profits

Are foreign companies that operate in the U.S. understating their earnings to cut their U.S. tax bills? You might think so in light of their scant profits compared to their U.S. counterparts. A new Federal Reserve Bank of New York study, however, blames the profit drought mainly on the foreigners' $316 billion acquisition binge over the past decade.

Economists David S. Laster and Robert N. McCauley report that foreign companies not only shelled out somewhat more than the hefty takeover premiums paid by U.S. companies but often bought far less profitable operations. Moreover, the foreign companies tended to boost investment outlays of their acquired operations, whereas domestic acquirers focused more on cutting away fat. And the heavy debt incurred in acquisitions also depressed profits.

Because the performance of foreign-owned operations has a tendency to improve over time, the researchers think the U.S. tax take will rise in the future--as well as the profits that foreigners send home.