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 acquisition Partial acquisition shared Equity Joint Venture Partial acquisition shared ownership Greenfield Wholly-owned subsidiary Full acquisition full

Factors that affect the choice greenfield vs. acquisition Match between MNE and local assets to be bundled Degree of integration desired growth rate of target market Managerial resources of foreign investor Risk aversion of foreign investor Availability of targets 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 Are those factors valuable? Are those factors hard to acquire in unbundled form? 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 + = Acquisition + =

Change in Equity Price of Acquirer One Year after Acquisition for 107 Cross Border Deals, 1996-1998 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 Reality (in most cases) Acquisition objectives Strategic evaluation Acquisition opportunity Financial evaluation Negotiation

2. Limited information International accounting differences Consolidation Extra-ordinary items Provisions Other undisclosed items Environmental exposure Other undisclosed liabilities

In perspective Daimler-Benz’s net profit/loss; DM bn 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 Preservation Symbiosis Need for Organizational Autonomy Low [Holding] Absorption Types of Acquisition Integration Approaches