Greenfield vs. Acquisition/Merger

Greenfield vs. Acquisition/merger

Foreign operations require bundling imported and local factors

Greenfield: the MNE does most of the bundling

Acquisition/Merger: the MNE buys an already mostly bundled package

Mode of entry

greenfield

GreenfieldEquity JointVenture

acquisition

GreenfieldWholly-owned subsidiary

Fullacquisition

ownership

shared

full

Partialacquisition

Factors that affect the choice greenfield vs. acquisition

1. Match between MNE and local assets to be bundled

2. Degree of integration desired

3. growth rate of target market

4. Managerial resources of foreign investor

5. Risk aversion of foreign investor

6. Availability of targets

7. Legal restrictions

Factors that are usually bundled within firms

• Trademarks

• Relationships with customers

• Relationships with governments

• Company culture

• Tacit know how

1. Match between MNE and local assets

a. Are those factors valuable?

b. Are those factors hard to acquire in unbundled form?

c. Can those factors be bundled with MNE factors?

Is it efficient to bundle MNE factors with those of a local firm?

• MNE competitive advantage is in marketing or management

• MNE competitive advantage is in human or technological processes

Greenfield vs. Acquisition

Greenfield

Acquisition

+

+

=

=

Change in Equity Price of Acquirer One Year after Acquisition for 107 Cross Border Deals, 1996-1998

17%

30%

53%

Deals added value

Deals produced no discernibledifference

Deals destroyed value

Source: KPMG

Most acquisitions are ultimately divested

Proportion divested

(%)

1. All acquisitions 53

2. Acquisitions in new fields 61

3. Acquisitions in unrelated new fields

74

4. Joint ventures 40(Source: Porter)

Acquisition challenges

a. Acquisition process

b. Post-acquisition integration

a. Acquisition process

• Choosing the right target

• Paying the right price

• Dealing with stakeholders (unions, government, media)

Acquisition process

1. Time pressure

2. Limited information

3. Lack of overall vision

4. Danger of escalating commitment (winner’s curse)

1. Time Pressures in the Pre-Acquisitive Decision-Making Process

Theory

Acquisition objectives

Acquisitive search

Strategic evaluation

Financial evaluation

Negotiation

Acquisition objectives

Strategic evaluation

Financial evaluation

Negotiation

Acquisition opportunity

Reality (in most cases)

2. Limited information

International accounting differencesConsolidation

Extra-ordinary items

Provisions

Other undisclosed itemsEnvironmental exposure

Other undisclosed liabilities

In perspectiveDaimler-Benz’s net profit/loss; DM bn

-2

-1

0

1

2

1990 91 92 93 94German accounting rules

American accounting rules

Sources: Extel Financial; Company reports

b. Post-acquisition integration

Level of integration should match expected benefits

• Strategic (pre-empt competitors)• Bargaining gains (market power,

purchasing economies)• Scale and scope economies (reputation,

know-how, distribution)• Skill transfer

Need for Strategic Interdependence

Low High

High

Low

Preservation Symbiosis

[Holding] Absorption

Need for Organizational Autonomy

Types of Acquisition Integration Approaches