The feds have it all wrong.

When the Commerce Department issued a report earlier this year noting that Hollywood was truly a global industry, it missed the point that foreigners are, in a great part, actually paying for this expansion.

For one, three of the top six studios show up in annual reports overseas. And , Wall Street finds it nearly impossible to dig out the numbers to compare what one film company does versus another.

This lack of information, dubbed a “black hole,” by Hal Vogel, a media analyst at Merrill Lynch best known for his book “Entertainment Industry Economics,” poses some serious issues for the industry as a whole.

“My stand is it’s important to the community. If 5% of the community’s activity in films, recorded music and TV were foreign owned, it wouldn’t matter. But if it’s 30% of the activity, you ought to know some more, while these companies only have to give out the absolute minimum.”

Matsushita, for example, is registered on the New York Stock Exchange and must file, essentially, only its annual report to satisfy foreign reporting requirements with the Securities & Exchange Commission.

However, in its annual report, MCA/Universal’s revenues are lumped under a general “entertainment” category with only sales and operating income reported. MCA itself isn’t separately presented. Moreover, Matsushita’s share of JVC, which makes televisions, and has also directly invested in Largo Entertainment, is also included in the “entertainnment” category.

So who knows how well the company’s film, TV and record operations are doing? The company isn’t required to break out detailed divisional performance, as a public U.S. company is. So there’s no way for analysts to work out the entertainment segment’s operating profits, amortization, cash flow or investment in film production. “Basically, they can hide their performance, and usually do, unless it’s good news,” said one analyst.

Pressure from the rumor mill can, in fact, persuade foreign owners to disclose some numbers, it seems. In a rare move last December, MCA Music Entertainment chairman Al Teller actually announced the company’s domestic sales had rebounded to $ 300 million in response to rumors that it’s bottom line had continued to slump from earlier troubles.

That’s a rare moment, however, and Teller still didn’t say what thegroup’s international sales were, or how much the division actually earned.

Overall, there’s been a lot of hand wringing over the foreign buying spree of U.S. companies in the late 1980s. That trend seems to have fallen off in the money-crunched ’90’s, with the Japanese, for example, spending only about $ 2 billion to purchase public companies in the U.S. last year, down 50% from the year before, and way down from 1990, when Matsushita paid $ 6.1 billion for MCA.

But foreign ownership has left both the feds and business community speculating what exactly is going on within companies that were targets of foreign buyouts and how beneficial those buyouts have been to the U.S. economy has a whole. The impact has particularimportance in the entertainment industry, which the feds found has globalized at twice the rate of other U.S. industries, and where foreign investment has decidedly dropped off over the past two years.

The Commerce Department measured its globalization trend through labor force, not financial, statistics. It found that foreign-based firms employed more than 10% of the U.S. entertainment industry’s work force, up 553%, since 1977, and twice the national average.

That statistic can have many consequences. On salaries in the industry, for one thing, though personnel officers at the studios seem to agree that the wage structures at both American and foreign-operations are quite similar. “We all know what our competitors salaries are and there’s not much difference, except perhaps at the very top, but we don’t have any control over that,” says a top personnel officer at a leading studio.

Another result is that as U.S. operations become a larger profit contributor to a foreign owner’s total, it can affect how the company is both perceived by the investment community, as well as the company’s corporate culture itself.

That’s how Mark Riley, a principal of money management firm Riley and Grippo, views what’s happening at Australian-based News Corp., which owns 20th Century Fox.

“As a greater percentage of its earnings are from the U.S., News is becoming more like an U.S. company in many ways,” he says. And, since the company is now financing itself through stock and bond sales in the United States, “it certainly is of much greater interest to American investors than it was before,” he says.

Perhaps the biggest affect of foreign ownership in Hollywood has been on deal flow. MCA and Sony were purchased at top prices. Since then, valuations have scaled back and the Hollywood deal flow is no longer a flood, with about one-third of the industry’s assets in foreign hands.

“The industry, at least from a financial standpoint, operates more like an iceberg, a lot happening below the surface, than it did 10 years ago,” says one prominent lawyer and dealmaker. He says deals have stalled because “no one is quite sure what anything is worth in today’s market. The comparisons are skewed because there are fewer separate independent companies trading to provide valuation benchmarks.”

Not that it’s impossible to value studios owned by foreign owners, analysts point out. Boxoffice figures are available, as well as a general idea of how much is spent on individual films. “It’s simple math to come up with market-share calculations,” says one analyst. “You just assume their overhead mirrors any other studios.” However, adding recording and TV operations presents another element of difficulty in determining the overall evaluation of foreign operations.

“It takes a lot more time in this environment to perform certain types of entertainment valuations,” agrees Paul Much of Hoolihan Lokey, a valuation firm. “Much more due-diligence is required. And there’s more difficulty in seeking out the information. I’ve found that the companies themselves might talk to you and reveal whatever is appropriate.”

Steven Bannon, an investment banker with his own firm in Beverly Hills, totally disagrees. “Foreign ownership isn’t holding up deals in Hollywood today. The problem of finding financing is holding up transactions.”

Perhaps one element of that problem is that foreign money isn’t flowing as easily into Hollywood as it once was–in any form. The Japanese exodus has been the most easily identifiable, with Nissho Iwai, a trading company, pulling out of its intended involvement with Thom Mount Co. and Ascii’s corporate debt troubles possibly limiting its additional funding for Ed Pressman Films, as two examples.

Even producers with existing deals with Japanese partners are concerned about their futures. “Luckily, my partners are long-term planners and let me know far in advance of their budgets,” says one leading producer, who preferred to remain anonymous. “But, are people worried? You bet.”

Moreover, as making money in the entertainment industry becomes tougher, there is speculation that the rate of returns that foreign owners of entertainment companies are earning on their investments here are much lower than they expected. The consequences of that, particularly for the Japanese, whose economy is going through its own recession, is that the Japanese could start selling off their U.S units.

Sony and Matsushita are no exception, since both companies are suffering from the weakness in the Japanese economy and the global consumer sector.

“The most direct impact of foreign ownership in Hollywood is that it made a lot of stockholders rich through the buyouts,” says Steve Rattner, a managing director at Lazard Freres. “But the upshot is that these companies, the Japanese in particular, haven’t made a lot of money.”

Some experts contend the future of these investments is uncertain. “No one knows what Sony or Matsushita are going to do long term with their assets here,” says another dealmaker. MCA is dwarfed, for example, by Matsushita’s other operations. The Japanese parent has $ 50 billion in sales. “How important is MCA to the company’s overall operations? Not very,” is the dealmaker’s conclusion.

But, contends another financier: “There’s no bright future in the hardware business. It makes Matsushita’s and Sony’s acquisition of

software companies look like a good movie. I think ultimately these investments will look like smart investment. They had to diversify.” Future acquisitions, however, are likely to be fueled by other standards than those of the past. “Buyers aren’t looking at things at all like they used to,” says lawyer Peter Dekom. He says the difference is that buyers, now, are exclusively strategic buyers. “Valuations are more a result of what these buyers may do with the products themselves. It’s an internal decision, about what the buyer plans to do with the product, not investor-analyst driven.”

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