Green Field vs. International Acquisition: An Overview

When businesses decide to expand their operations to another country, one of the more vexing dilemmas they face is whether to create a new operation in the foreign country using a green field investment or simply purchase an existing company in the foreign country through an international 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. One of the biggest considerations in expanding abroad is the regulatory and compliance rules that a company may need to research and adhere to. Acquiring an existing company may prove to make an international business expansion easier in this regard or a parent company may desire to build out the new infrastructure on their own. Either way, there will be a multitude of costs and projections to consider for both types of investments.

Both international acquisitions and green field investments involve understanding and adhering to the local business laws of a specified foreign country.

International Acquisition

Acquiring an international company can be structured in a few different ways. A company may choose to buy the entire company, buy parts of the company, or acquire a significant portion of the company that gives it certain ownership rights.

In general, there are many reasons why an international acquisition can be optimal for expansion. In most cases, an international business is expected to be fully integrated and compliant with international laws and regulations. In this regard, keeping members of the current management team and most of the current executive level processes in place would be beneficial to an expansion. In general, buying an overseas business can simplify a lot of the tedious details involved in entering a new market.

Another top reason to choose an acquisition over a green field investment is market share. If an international business prospect holds a significant market share in the country, the time to market introduction and competition for a green field investment would likely not be worthwhile. Other reasons a foreign acquisition could be better than a green field investment include considerations such as training, supply chain, lower cost of labor, lower cost of service or manufacturing, existing employed labor, existing executive management team, brand name, customer base, financing relationships, and financing access.

Finally, the most important consideration is usually cost. An acquisitions team will fully consider the costs of an international acquisition versus the costs of a green field investment in terms of net present value, internal rate of return, discounted cash flow, and impact to earnings per share. Based on these areas of analysis a team would want to identify the most cost-effective investment decision. With all types of investments, there are a multitude of costs involved. Acquiring a company in another country can often be relatively less expensive because licenses, registrations, building infrastructures, and other business assets are already in place. Buying an existing business with existing assets is usually less costly and also includes less time needed for market introduction.

Even if an acquisition is the most cost-effective choice however, it is important to keep in mind that some caveats might exist. One main potential issue is that when buying a company, there may be regulatory barriers that inhibit the acquisition because of the scale of the two combined businesses after the acquisition or for other reasons. International regulatory approvals can be lengthy. They can also ultimately result in a blocking of the entire acquisition altogether or certain divesting requirements that can be problematic for a deal.

Green Field Investment

A green field investment is a corporate investment that involves building a new entity in a foreign country. In a green field investment, the parent company seeks to create a new business, usually with the parent company’s branding. Green field investments can be for the purpose of targeting customers in the foreign region or they may involve building facilities and employing labor for work that reduces a company’s overall costs. Green field investments are also known as foreign direct investments (FDI). In a green field investment, the new company must typically adhere to all local laws regardless of its parent company association.

One of the top reasons for making a green field investment is the lack of suitable targets in the foreign country for acquisition. Alternatively, a company may find acquisition targets but see serious difficulties involved in integrating a parent company with a target. In some cases, a green field investment may be the best option because businesses can gain local 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.

Just like in the analysis of an acquisition, a green field investment requires a detailed analysis of the investment’s costs and expected return. Green field investment analysis will typically focus more heavily on net present value and internal rate of return calculations since the goal is to make an investment in building a newly created company that will generate returns in the future. This differs from the need to analyze an already existing business using standard analysis like discounted cash flow and enterprise value.

A green field investment analysis can have slightly higher risks than an acquisition because the costs may be unknown. With an acquisition, analysts usually have actual financial statements and costs to work with. In a green field investment, it can be important to use analysis of similar companies or business models in the target market to obtain a framework for costs. In general, green field investment analysis involves structuring a detailed business plan along with building a financial model that includes all of the expected costs. With a green field investment, there can be slightly more flexibility to adjust costs according to the parent company’s business plans. In a green field investment, a parent company would need to obtain costs for land, building licenses, building construction, maintenance of new facilities, labor, financing approvals, and more.

Key Takeaways

  • Green field investments and international acquisitions are two ways a company can choose to expand its business into a foreign market.
  • International acquisitions involve acquiring a company that is already in existence.
  • A green field investment involves building a completely new business through a business plan developed by the parent company.
  • Varying methods of financial analysis are used when assessing the potential profits of an acquisition vs. a green field investment.

Special Considerations: Financial Analysis

In acquisitions and other large capital project analysis, there are a few common types of financial modeling analysis that are standard for the financial industry.

Net present value (NPV): Net present value analysis identifies the present value of future cash flows for an investment. NPV is usually used in capital project analysis where investment projections are based on hypothetical estimates. It uses an arbitrary discount rate depending on risk with the U.S. Treasury’s rate serving as the risk-free rate.

Discounted cash flow (DCF): Discounted cash flow is similar to NPV. DCF discounts the future cash flows of a business to arrive at a company’s present value. DCF is usually used when dealing with valuations of existing companies. It uses a company’s weighted average cost of capital (WACC) as the discount rate.

Internal rate of return (IRR): The internal rate of return is the discount rate in an NPV calculation that results in an NPV of zero. This rate provides analysts with the rate of return on the investment.