A:

When businesses decide to expand their operations to another country, one of the more important dilemmas they can face is whether it is most beneficial to have the business take matters into its own hands and create a fresh new site of operations in the foreign country via a green field investment, or to simply purchase an existing company in the foreign country through an acquisition.

While both methods will usually accomplish the goal of extending a company's operations to a new foreign market, there are several reasons why a company might choose one over the other.

Businesses may be more inclined to opt to acquire an existing foreign business in situations where it is difficult to enter a foreign market. Buying a foreign businesses simplifies a lot of potentially tedious details. For example, the purchased business will already have its own personnel (both labor and management), allowing the acquiring company to avoid having to hire and train new employees.

Furthermore, the purchased company may already have a good brand name and other intangible assets, ensuring that the company will start off with a good customer base. Purchasing a foreign company can also provide the parent company with easier access to financing, because there may be less red tape to navigate around. Finally, if a foreign market is at or near its saturation point, buying an existing company may be the only viable way to enter a foreign market.

A business may also choose to build a foreign subsidiary from the ground up instead of making an acquisition. Depending on the countries or companies involved, there may be serious difficulties involved in integrating a parent company with its acquisition targets. Differences in corporate culture between the two organizations, for example, can stymie effective operations.

A business may also make a green field investment if there is not a suitable target in the foreign country to acquire. This is favorable in situations where businesses can gain government-related benefits by starting up from scratch in a new country, as some countries provide subsidies, tax breaks or other benefits in order to promote the country as a good location for foreign direct investment (FDI).

To learn more about acquisitions, see Mergers And Acquisitions - Another Tool For Traders or
The Wacky World of M&As.

RELATED FAQS

  1. Why should management teams focus more on horizontal integration?

    Understand the benefits of a horizontal integration and why management teams should focus more on a horizontal integration ...
  2. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ...
  3. Why are the terms 'merger' and 'acquisition' always used together if they describe ...

    Learn about mergers and acquisitions and how these two corporate actions differ based on the size and participation of the ...
  4. What level of mergers and acquisitions is common in the chemical sector?

    Examine the current level of mergers and acquisitions among companies in the chemicals sector, a level that has surged higher ...
RELATED TERMS
  1. Vertical Merger

    A merger between two companies producing different goods or services ...
  2. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  3. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  4. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  5. Assisted Merger

    The merger of two or more financial institutions undertaken with ...
  6. Assuming Institution

    A healthy financial institution that purchases the assets of ...

You May Also Like

Related Articles
  1. Fundamental Analysis

    Can You Invest in China's Huawei?

  2. Investing

    American Airlines & US Airways Merger: ...

  3. Mutual Funds & ETFs

    Top Foreign Debt ETFs & Funds for Diversification

  4. Chart Advisor

    3 Basic Material Stocks Poised For A ...

  5. Investing

    How To Trade Foreign Stocks

Trading Center