Greenfield vs. Acquisition/Merger

Green Field Venture Vs Mergers & Acquisition

Dr. Jayaraj R

Wholly owned subsidiary• 100% of the stock. 2 types. One is green field

venture, next it can acquire an established firm in that host nation and use that firm to promote its product.

• Advantages:– No risk of losing technical competence to a

competitor– Tight control of operations.– Realize learning curve and location economies.

• Disadvantage:– Bear full cost and risk

Greenfield vs. Acquisition/merger

Foreign operations require bundling imported and local factors

Greenfield: the MNE does most of the bundling

Creating production & marketing facilities on a firm’s own is termed as GF.

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

Acquisition and Green-field- pros & cons

• Pro:

– Quick to execute– Preempt competitors (right to do

something b4 someone)

– Possibly less risky

• Con:

Disappointing results

Overpay for firm

optimism about value creation (hubris)

Culture clash.

Problems with proposed synergies

• Pro:

– Can build subsidiary it wants

– Easy to establish operating routines

• Con:

– Slow to establish

– Risky

– Preemption by aggressive competitors

Acquisition Greenfield

greenfield

GreenfieldEquity JointVenture

acquisition

GreenfieldWholly-owned subsidiary

Fullacquisition

ownership

shared

full

Partialacquisition

Mode of entry

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

Greenfield vs. Acquisition

Greenfield

Acquisition

+

+

=

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Mergers

A merger is a transaction that results in the transfer of ownership and control of a corporation.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated.

This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

3 Types of Mergers

Economists distinguish between three types of mergers:

1. Horizontal

2. Vertical

3. Conglomerate

Horizontal mergers

A horizontal merger results in the consolidation of firms that are direct rivals—that is, sell substitutable products within overlapping geographic markets.

Examples: Boeing-McDonnell Douglas; Staples-Office Depot(unconsummated); Chase Manhattan-Chemical Bank; Southern Pacific RR-Sante Fe RR; Pabst-Blatz; LTV-Republic Steel; Konishiroku Photo-Minolta.

Vertical Mergers

The merger of firms that have actual or potential buyer-seller relationships

Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney, Ford-Bendix.

Conglomerate mergers

Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated.

•Product extension conglomerate mergers involve firms that sell non-competing products use related marketing channels of production processes.

Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor & Gamble-Clorox.