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 firms own is termed as GF. Acquisition/Merger: the MNE buys an already mostly bundled package

Acquisition and Green-field- pros & cons

Acquisition Greenfield
Pro: Pro: Quick to execute Can build subsidiary it wants Preempt competitors (right to do Easy to establish operating something b4 someone) routines Possibly less risky Con: Con: Slow to establish Disappointing results Risky Overpay for firm Preemption by aggressive competitors optimism about value creation (hubris) Culture clash. Problems with proposed synergies

Mode of entry greenfield acquisition

shared
ownership

Greenfield Equity Joint Venture Greenfield Wholly-owned subsidiary

Partial acquisition

full

Full acquisition

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

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 rivalsthat 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; LTVRepublic 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 ShoeKinney, 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.