Q1.. Acquisitions and greenfield investments – the pros and cons
By Terry Irwin On 23 October 2012 • Add Comment • In Acquisitions, mergers and post-acquisition integration
If the Autumn forecast from Ernst & Young’s Item Club is accurate (see my 16 October blog), the 2013 recovery will bring opportunities in emerging markets for UK companies that can identify them. But even if you spot a good opening in a foreign market, the mode of entry you choose can make all the difference between success and crippling failure. Today and in my next few blog entries I’ll be describing the different ways in which you can take your business global, and the pros and cons of each.
1. Acquiring an existing company
This method may mean short-term cash, but it won’t necessarily guarantee future stability. Around 50% of merged businesses never achieve their projected financial and market goals. When you acquire a company, you also acquire its existing problems. And you will need to decide whether the acquisition should be financed by cash or stock.
The pros of this approach are:
• You gain access to an established market.
• You have skilled workers at your disposal.
• Licences are “grandfathered” in.
• You instantly acquire the target company’s technology, clients and vendors.
• Negotiations usually occur at top level, and the target company handles licensing and compliance.
• You have instant branding.
• You have one less competitor to deal with.
• Your knowledge base increases.
Against this, you need to consider:
• Could there be hidden surprises?
• Which of the target company’s employees are politically connected, and with whom?
• “Favours” and concessions may be assumed.
• The target company’s technology may well be outmoded, and it will probably have chosen its vendors for reasons other than merit.
• Branding is often not part of HQ’s ideals.
• An acquisition is often expensive and time-consuming.
• It necessitates a blending of corporate cultures.