12.4: Greenfield Venture or Acquisition? Flashcards
What is a greenfield strategy?
A greenfield strategy involves establishing a wholly owned subsidiary in a foreign country by building the subsidiary from the ground up.
What has been the trend for cross-border acquisitions in the last two decades?
Cross-border acquisitions have been growing rapidly, with 40 to 80 percent of all foreign direct investment inflows being in the form of mergers and acquisitions.
What are the three major benefits of acquisitions?
The benefits of acquisitions include:
they are quick to execute,
can preempt competitors,
and are perceived to be less risky than greenfield ventures.
Why might managers believe acquisitions to be less risky than greenfield ventures?
Managers may view acquisitions as less risky because they involve buying a set of assets that are already producing a known revenue and profit stream, as opposed to the uncertainty of a new venture.
What is the “hubris hypothesis” in the context of acquisitions?
The hubris hypothesis suggests that acquisitions may fail because top managers overestimate their ability to create value from the acquisition due to an exaggerated sense of their own capabilities.
According to studies, what percentage of acquisitions actually create value for the acquiring company?
Studies have found that around 30 percent of acquisitions create value, while 31 percent destroy value, and the remainder have little impact.
What can cause acquisitions to fail according to the text?
Acquisitions can fail due to factors like
overpaying for assets,
cultural clashes between firms,
challenges in realizing gains by integrating operations,
and inadequate pre-acquisition screening.
How can cultural differences impact the success of an acquisition?
Cultural differences can lead to management turnover, conflicting decision-making processes, and can create tensions that harm the performance of the acquired unit.
What is the impact of poor pre-acquisition screening?
Inadequate pre-acquisition screening can lead to acquiring troubled businesses, which may result in the acquisition destroying rather than creating value.
What can be the consequences of paying a significant premium over a target firm’s market capitalization?
Paying a significant premium can be risky and may lead to an acquisition failing, as it might not be possible to recover the investment if the anticipated synergies do not materialize.
What should a firm’s acquisition strategy include to reduce the risk of failure?
The acquisition strategy should include a detailed auditing of operations, financial position, and management culture to ensure that the firm does not overpay, uncover unpleasant surprises, or acquire a firm with a clashing organizational culture.
Why is it important for the acquirer to allay any concerns of management in the acquired enterprise?
It is to reduce unwanted management attrition after the acquisition and to ensure a smoother integration process.
What are three things a firm should ensure to reduce the risks of failure in acquisitions?
(1) Do not overpay for the acquired unit.
(2) Avoid nasty surprises post-acquisition. (3) Acquire a firm whose culture is not antagonistic to the acquiring enterprise.
Why is it important for the acquirer to allay any concerns management in the acquired enterprise might have?
It is important to reduce unwanted management attrition after the acquisition.
What should managers do after an acquisition?
Managers should rapidly put an integration plan in place and act on that plan.
