BUY-VERSUS-BUILD DECISION
BUY-VERSUS-BUILD DECISION
There are advantages and disadvantages to the alternatives of acquiring an interest in an existing operation or constructing new facilities. The MNE must consider the alternatives carefully.
Reasons for Buying
A major motive for seeking acquisitions is the difficulty of transferring some resource to a foreign operation or acquiring that resource locally for a new facility. One particularly difficult resource is personnel, especially if the local labor market is tight. Instead of paying higher compensation rates than competitors to entice employees away from their old jobs, the buy-in approach gains not only labor and management but also a whole organizational structure through which these personnel may interact. Acquisitions also may be a means of gaining the goodwill and brand identification important for mass consumer products, especially if the cost and risk of breaking in a new brand are high. If a company must depend substantially on local financing rather than on the transfer of capital, it may be easier to gain access to local capital through an acquisition. For one thing, local capital suppliers may be more familiar with an ongoing operation than with the foreign enterprise. Second, an existing company may sometimes be acquired through an exchange of stock, thus circumventing home-country exchange controls.
In other ways acquisitions may reduce costs and risks as well as provide quicker results. A firm may be able to buy facilities, particularly those of a bankrupt operation, for less than it would cost to build plants at current construction costs. If an investor fears that a market does not justify added capacity, such as in the Bridgestone situation, acquisition avoids the risk of depressed prices and lower unit sales per producer that might result from new facilities. Finally, by buying a company an investor avoids the high expenses caused by inefficiencies during the start-up period and gets an immediate cash flow rather than tying up funds for the period of construction.33
Reasons for Building
While the advantages just mentioned are possible through acquisitions, a potential investor will not necessarily be able to gain them. Since foreign investments frequently are made where there is little or no competition, it may be difficult to find a company to buy. In addition, local governmental restrictions may prevent the purchase of firms for fear of lessening competition or dominance by foreign enterprises. Those firms that can be acquired may create substantial problems for the investor: personnel and labor relations may be both poor and difficult to change, ill will rather than goodwill may have accrued to existing brands, or facilities may be inefficient and poorly located in relationship to future potential markets. Finally, local financing may be easier rather than harder to obtain if a firm builds facilities, particularly if the investor plans to tap development banks for part of its financial requirements.
There are advantages and disadvantages to the alternatives of acquiring an interest in an existing operation or constructing new facilities. The MNE must consider the alternatives carefully.
Reasons for Buying
A major motive for seeking acquisitions is the difficulty of transferring some resource to a foreign operation or acquiring that resource locally for a new facility. One particularly difficult resource is personnel, especially if the local labor market is tight. Instead of paying higher compensation rates than competitors to entice employees away from their old jobs, the buy-in approach gains not only labor and management but also a whole organizational structure through which these personnel may interact. Acquisitions also may be a means of gaining the goodwill and brand identification important for mass consumer products, especially if the cost and risk of breaking in a new brand are high. If a company must depend substantially on local financing rather than on the transfer of capital, it may be easier to gain access to local capital through an acquisition. For one thing, local capital suppliers may be more familiar with an ongoing operation than with the foreign enterprise. Second, an existing company may sometimes be acquired through an exchange of stock, thus circumventing home-country exchange controls.
In other ways acquisitions may reduce costs and risks as well as provide quicker results. A firm may be able to buy facilities, particularly those of a bankrupt operation, for less than it would cost to build plants at current construction costs. If an investor fears that a market does not justify added capacity, such as in the Bridgestone situation, acquisition avoids the risk of depressed prices and lower unit sales per producer that might result from new facilities. Finally, by buying a company an investor avoids the high expenses caused by inefficiencies during the start-up period and gets an immediate cash flow rather than tying up funds for the period of construction.33
Reasons for Building
While the advantages just mentioned are possible through acquisitions, a potential investor will not necessarily be able to gain them. Since foreign investments frequently are made where there is little or no competition, it may be difficult to find a company to buy. In addition, local governmental restrictions may prevent the purchase of firms for fear of lessening competition or dominance by foreign enterprises. Those firms that can be acquired may create substantial problems for the investor: personnel and labor relations may be both poor and difficult to change, ill will rather than goodwill may have accrued to existing brands, or facilities may be inefficient and poorly located in relationship to future potential markets. Finally, local financing may be easier rather than harder to obtain if a firm builds facilities, particularly if the investor plans to tap development banks for part of its financial requirements.
Comments
Post a Comment