GreenfieldWhat is a Greenfield investment? How does it compare to an acquisition?
The distinguishing characteristic about a greenfield investment is that it is a form of direct foreign investment in which multinational companies start up new business ventures in foreign countries. The advantages are two-fold. Firstly, the parent company has expanded facilities at lower costs by directing venture capital to foreign countries. Secondly, employment opportunities are expanded in the foreign countries as jobs are created by the venture. Very often the greenfield partners are developed countries who make direct foreign greenfield investment in developing countries that offer tax incentives or subsidies to the parent company.
Acquisitions have been in the news recently with various debates over the morality of Bain Capital and its actions. I think I might be more in favor of a Greenfield strategy overall, but for large companies, an acquisition is often a very good idea; there is name recognition of products, there is scope for refining and streamlining the system, and if the company is failing, it is possible to offer employees at least a few more months of employment, giving them time to search for a new job. However, for smaller businesses, Greenfield is the obvious choice unless you are already a millionaire.
A Greenfield Investment involves building a production or manufacturing facility where there is little to no infrastructure in place. An acquisition can be made for cash, stock, or a combination thereof. A company may acquire a part of, or an entire company. For example, Proctor & Gamble was recently trying to sell its Pringles division. Acquisitions are also part of "M & A Departments," otherwise known as "Mergers and Acquisitions." Many times M & A's do not work out in the long run, such as the AOL & Time Warner merger.
There are definite swings and roundabouts to both a greenfield investment and an acquired investment. Let us remember that a greenfield investment is starting something almost completely from base point, so there are no structures and staff in place. This means you are able to shape that project the way you want to. An acquired investment already has its staff, culture and infrastructure, and these are three things that are notoriously difficult to change quickly if you need to.
Investing in a brand-new company involves risks, perhaps more risks than acquiring a successful company that already exists. However, the returns if the start-up is successful can be enormous. Warren Buffet, however, seems to have made most of his money by looking for companies that already existed which he felt were under-valued.
With the acquisition, you tend to get the staff that is already working for the company you acquire. You get the firm's corporate culture. You will have a harder time creating your own corporate culture and molding that firm in the way that you want it.