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No. 3998

CROSS-BORDER ACQUISITIONS
AND GREENFIELD ENTRY:
PROFITABILITY AND ST OCK
MARKET VALUE


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Copyright: Pehr-Johan Norbäck and Lars Persson
CEPR Discussion Paper No. 3998
August 2003
ABSTRACT
Cross-Border Acquisitions and Greenfield Entry:
Profitability and Stock Market Value*
This Paper studies cross-border acquisitions and greenfield entry in a multi-
firm setting. Acquisition entry is more likely when the acquirer gains a strong
position in the product market, relative to greenfield entrants. We also show
that such acquisitions might have a low profitability, however. The reason is
that the bidding competition over the domestic assets is then so fierce that the
firms involved would be better off not starting a bidding war. Moreover, this
implies that domestic firms will then sell their assets at a substantially higher
price than their reservation price. Implications for stock market values are also
derived.
JEL Classification: F23, G34 and L13
Keywords: FDI, mergers and acquisitions and stock market value
Pehr-Johan Norbäck
Research Institute of Industrial

1. Introduction
Multina tion al Enterprises (MN Es) are often associated with firm specific assets.
1
Suc h
assets, which includ e marketing ab ility, brand names, patents o r tec hn ology, enable th ese
firm s to profitably expand production abroad. W hen expanding business abroad, MNEs
canbasicallyusetwotypesofbusinessstrategies; they can e ith er a cquire (or m erg e with)
a firm in the host co untry or invest greenfield, i.e. set up a new p lant in th e h ost coun try.
Sev eral factors ha ve been argued to be important for e xplaining wh y MNEs p refer
to gro w via M &As rather than through organic gro wth: the quest for strategic or com-
plementary assets, such as b ra nd names, the possession s of local permits or d istrib ution
netw or ks and patents. When the time to mark et is vital, the takeover of an existing firm
with an established distributio n system m ig ht also b e preferable.
2
The importance o f
the d om estic assets will d epend on the strength of complementarities between MNEs’
firm -specific assets and the domestic assets. For example, the com b ination of a n MNE ’s
strong brand name and the acquired firm’s knowledge of the market or strength in dis-
tribution, may provide the acquiring M N E with a strong mark et position. In order to
capture th ese aspects, the dom estic assets will be said to b e strategically valuable when
combining an MNEs firm specific asse ts with the do m es tic assets gives t he acqu irer a
stron g position in the product mar ke t, re lative to greenfield entrants.
We present a model where we indeed sh ow that a h igh str ategic value of the dom estic
assets is conducive to acquisitions. Howev er, while acquisition entry is associated with
a high strategic value of the dome stic assets, we also show that su ch a cqu isitions might
hav e a lo w expected profita bility. In the model, a domestic firm is initia lly located in th e
dom estic market in country H. There are also sev eral symm etric M N E s located in the
world market. T h e domestic m arket will now be exposed to intern ational competition.
The interaction ta kes place in thr ee stages. In the firststage,theMNEsmightacquire
the dom estic firm’s assets. In the seco nd sta ge, MNEs h ave the option o f investing

that the merger com es as a surprise for th e financial markets, the empirical im p licatio n
is then that the ta rget firm’s sha reh olders benefit f r om the acqu isitio n and that th e
takeo ver premium is increasing in t he stra tegic im portance of the d omestic assets. T he
predictions for the poten tial acquiring firms are more in volved. H owev er, w e find that
the share value of both the acquirer and a non-acquirer will decrease w hen an acquisition
is announced, if the domestic assets a r e sufficiently strategically valuab le. This is due to
3
the fact that the bidding com petition is then so fierce that the firms involv ed wou ld be
be tter off not starting a bidding war.
IntheliteratureonMNEs
3
, it has also been argued that one of the main benefits from
acquiring a local competitor instead of en tering greenfield is that the acquisition helps
the firm avoid risks due to lack of knowledge of the specific characteristics of the local
market. By entering by an M & A , a n M N E avoids the individual risk of un successfu l
greenfield entry. Ho wever, w e show that the bidding competition over being successfully
loca ted in the mark et with certaint y may driv e up the acquisition price to suc h a lev el
that being a greenfield entrant is more profitable ex-post. B ut firmsalsofaceamarket
risk as realized product market profitforafirm may differ from the expected one. It
is th en sho w n that if firms a re sufficiently s ym m e tric, the stoc k market value of the
acquirer is reduced relative to that of a successful greenfield entrant, since the market
risk will then be similar between the two entry mod es and only the individual risk differ .
However, if competition becomes s ufficiently softer than expected and the strategic value
is sufficiently high, the aquirer’s stoc k m arket valu e will in crease relative to that of a
successful green field entrant.
The related theoretical lit erature on foreign direct in vestm ent FDI and MNE s is sur-
v e yed in Markusen (1995). Th is literatu re does no t explicitly address th e q uestion of
wheth er en t ry in to a foreign market is greenfield or th ro ugh the acquisition of a ssets
already in the mark et, or both, a n issue wh ich is at focus i n our study, h owev er.
4

of a product or stem from increasing local d ema nd , or the admin istrative co sts of cross-
bo rder acq uisition s and gree nfield entry may have been reduced in the globalization
process.
We assume there to be M>1 symmetric MN E s in th e world market. A t the o utset,
the MNEs ha ve no assets in Co untry H, but might n ow invest. The interaction takes
place in three stages. In the first stage, t he MNEs migh t a cquire the domestic firm’s
assets. In the second stag e, M N E s have the option of investing green field in n ew a ssets
in country H. Finally, in the third stage, firm s compete in oligopoly fashion in country
H.
The next sections describe the product market intera ction, the greenfield investm ent
game, and the acquisition game.
2.1. Stage three: product mark et in teraction
Theproductmarketprofits in the industry will depend on the distribu tion of asset
o w n ership. An asset o w nership v ector k is d efined as k ≡ (k
d
,k
1
,k
2
, , k
M
),whereentry
one r efers to firm d’s asset holdings, entry two to M N E 1’s asset holdings, etc. In order to
simplify the presentation, we will distinguish between two types of o w nersh ip structures:
(i) the on e where the d om estic assets are so ld to o ne of the MNE s, denoted k
m
,and(ii)
5
the one where the domestic assets remain in the hands o f the dom estic owner, denoted
k

{z }
M−N
m
−1
), α>0 (2.1)
k
d
≡ k
d
(N
d
,k
0
,k
G
) ≡ (k
0
,k
G
,k
G,
, k
G,
| {z }
N
d
0, , 0
|
{z }
M−N

(k
m
) denote the reduced-
form product market p rofit for the acquiring M NE , π
G
(k
m
) the c orresponding pro fit
for a non-acquiring MN E as a greenfield entrant, and π
E
(k
m
) the corresponding profit
for a non-ac quirin g M NE as an export e r (i.e. a non-inves t ing MNE). Under domestic
o wnership of the assets k
0
, M N E s are either greenfield entrants or exporters, with the
product mark et profits π
G
(k
d
) and π
E
(k
d
), r espectively. The corresponding profits for
the d omestic firm u nder the respectiv e ow nersh ip structures are π
d
(k
l

E
(k
l
) ≡ 0,h= {A, G}
π
d
(k
d
) >π
d
(k
m
) ≡ 0
A3:









∂π
A
(k
m
)
∂α
> 0,

may be used differen tly und er dom estic and foreig n ownership. As-
sumption 3 then states that an increase in the strategic value, α, increases the acquirer’s
profit, whereas the mark et profit for a non-acquirer (i.e. greenfield in vestor) decreases.
Thesizeoftheseeffects depends on the strength of co m plem entarities betw een MN E s’
firm -specific assets and the domestic assets. For example, the com b ination of a n MNE ’s
strong brand name and the acquired firm’s knowledge of the market or strength in dis-
tribution, may pro vide the acquiring MNE with a strong market position. If the brand
nam e of the domestic assets is locally v ery strong, the strategic valu e of the assets will
also be high. Or, if the domestic assets are sold at an early stage, the a cqu irer ma y gain
astrongfirst-mover a d vanta ge, b u ilding up a dom inant position in the produ ct market.
7
2.2. Stage t wo: Greenfield inv estm ents
At this stage, MNE s that did not enter the m arket through the acquisition o f firm d,
can e nter by undertaking a greenfield investment at a fixed cost, G. To sim p lify the
analysis, w e assum e that in vestments in greenfield assets k
G
are ”lumpy”, i.e. they come
in discrete assets or plan ts and the domestic firm does not find it pro fitable to invest in
this stag e due to, fo r instance, financial o r manager ial restrictions.
Assum ption A2 states th at there are locational advantages for MNEs of producing
in coun try H . In the literature on M NE s, greenfield entry is considered risky due to
the lack of knowledge of th e specific c ha racteristics of the local mark et. For exam ple,
Caves(1996)arguesthatoneofthemainbenefits of acquiring a local competitor instead
of entering green field is the avoidance o f such r isks. Moreove r, greenfield in vestm ents
contain a large initial investm ent under uncertain ty, w h ich is likely to be sunk to a large
degree. This is motivated by the fa ct that these a ssets are likely to be designed to fit
the p roduction in a particular industry an d the cost of restructuring them in to suitable
assetsinotherindustriesisassumedtobehigh.
6
To model this, we assum e that eac h

7
The
acquisition is solv ed for N ash equilibria in undominated pure strategies.
It is assume d th at firm d cannot m a ke a bid for th e M N E s. This assum p tion m ight
be motivated by the domestic owner being financially w ea ker or lac kin g the competence
to efficiently run the larger business. M or eov er, it is assum ed that M N E s canno t ma ke
bids on eac h other’s firms. This assumption migh t be suppor ted in two basic ways in
a full merger model. On e is to assume that the profit of a merged en tity is sufficiently
small to imply that no merger takes place between the M N E s,
8
the seco n d is to a ssu m e
that mergers between MNEs wo uld not be perm itted by the com petition authorities.
We now turn to the firm s’ valuations of the dom estic firm’s assets, k
0
.Notethat
when forming its valu ation in stage one, a firm does not know the outcome of the
greenfield gam e i n stage t wo. Hence, since the n u mber of su ccessful greenfield entrants,
N
l
, is stochastic, it fo llows that the asset ow nersh ip structure is also stochastic at the
acquisition stag e. To capture this, define the stochastic v ariable (or function) K
l
(·,N
l
)
with realizations in terms of asset o wn ersh ip structures, k
l
(·,N
l
). The expected produ ct

)π
h
¡
k
l
(·,N
l
)
¢
(2.3)
where π
h
¡
k
l
(·,N
l
)
¢
is th e product m a rket profitforfirm h when N
l
firm s en ter greenfield
successfully, ρ(N
l
)=
¡
N
l
max
N

= M and
¡
N
l
max
N
l
¢
denotes the
combinato rial function.
There are then three different valuations whic h need to be co nsid ered:
v
m
i
m
j
is the expected value for MNE i of obtainin g k
0
,whenMNEj would otherwise
obtain k
0
. U sin g sym m etry amo ng MNEs, w e will suppress the subindices and simply
write v
mm
.Thefirst term show s the expected product mark et profit when possessing k
0
.
The second term is the expected product market profitwhenarivalMNEobtainsk
0
, in

m
) − p
£
¯π
G
(K
d
) − G
¤
. (2.5)
v
d
istheexpectedvalueforthedomesticfirm of obtaining k
0
.Thisissimply:
v
d
=¯π
d
(K
d
). (2.6)
The firms’ bidding beha vior is dependent o n the relation bet ween their own valuation
of obtaining the assets k
0
and all other firms’ valua tions of o bta inin g these assets. Since
MN Es are symm etric, valuation s v
mm
,v
md

mm
>v
md
>v
d
K
m
v
mm
I2: v
mm
>v
d
>v
md
K
m
or K
d
v
mm
(if K
m
)
I3: v
md
>v
mm
>v
d

d
.
3.1. Post-Acquisition Expected Profits
In th is section, we examine h ow the M N E s’ expected n et profits are affected by th e
acquisition. T h ese profits are described in Figure 3.1. As a point of reference, we first
describe the expected n et profit in the ab sence of an acquisition,
¯
Π
h
(K
d
),whichwillbe
referred to as the Pre-Acquisitio n Expected (Ne t) Profit (depicted in Stage 0 in Figure
3.1), w here, in the following, we shall drop the net abbreviation . If no acq uisition
is expected to occur, the MNE s’ expected pro fits are
¯
Π
h
(K
d
)=p
£
¯π
G
(K
d
) − G
¤
for
h = {A, NA}, wh ereas the domestic firm’s expected profitissimply

Domestic
firm (d):
A
0. Investment
Liberalization
1. Acquisition game 2. Greenfield game and
3. Oligopoly interaction
k
m
EOS:

A
k
m
  A

h
k
m

Note:
A 
v
mm
: I1,I2 or I3
v
d
: I4

G

m
  A
p


G
K
m
  G
p

G
K
d
  G
p

G
K
d
  G
Pre-Acquisition Expected
(Net) Profit:
Post-Acquisition Expected
(Net) Profit:
Post-Greenfield
(Net) Profit:
Pre-Acquisition Expected
(Net) Profit:
Post-Acquisition Expected

: I1,I2 or I3
v
d
: I4

G
k
m
  G : entry
0:no-entry (exporting)


h
K
d



h
K
m

K
d
K
m


d
K

Π
h
(K
m
). ThisisreferredtoasthePost-Acquisition Expecte d Pr ofit (dep icted in Stage
1 in Figure 3.1). TheacquiringMNE’sexpectedprofitisthen
¯
Π
A
(K
m
)=¯π
A
(K
m
) − A,
whereas a non-acquiring MNE’s expected pro fitis
¯
Π
NA
(K
m
)=p[¯π
G
(K
m
) − G].The
dom estic fir m collects the acquisition price, i.e.
¯
Π

d
being fulfilled. Con sequ ently,
the acquisition pr ice will be such that an MN E is ind ifferent betw een acquiring and not
acquiring.
Part (ii) sho w s that, under I4, howev er, the acquirer’s Po st-A cquisition Expected
Profit w ill be lower than that o f the n on-acqu irer, i.e.
¯
Π
A
(K
m
) <
¯
Π
NA
(K
m
),since
the acq uiring MNE in this case m ainly pay s for eliminating a rival (the domestic firm).
Howev er, non-acquirers will also benefit from this elimination, b ut do not pay the price
for it. T here is thus a free rider problem associated with eliminating the do m estic rival.
Part (iii) sho w s that the P ost-A c qu isition Expected ProfitforallMNEswillfallas
compared to the correspo nding Pre-Acquisition Expected Profit, when the acquisition
takes place under I1 and I2, that is,
¯
Π
A
(K
m
)=

d
<v
md
.TheMNEs’ex-
pected profits then increase from an acquisition, since t he acquisition price is no w lower
than their willingness to pa y, if firm d w ould otherwise k eep its asset. Hence, we have
¯
Π
A
(K
m
)=
¯
Π
NA
(K
m
) >
¯
Π
NA
(K
d
) under I3 and
¯
Π
NA
(K
m
) >

Liberalization
Announcement:
Acquisition of
domestic firm
Announcement:
Greenfield entry
(Pre-Acquisition
Expected Profit)
(Post-Acquisition
Expected Profit)
(Post-Greenfield Profit:
Greenfield entrant)
(Post-Greenfield Profit:
Aquirer)
(Post-Greenfield Profit:
Exporter)

G
k
m


G
k
m
  G


A
k


 p
G
K
d
  G


A
K
m
 

NA
K
m

0. Investment
Liberalization
1. Acquisition game 2. Greenfield game and
3. Oligopoly interaction
Profit
k
m
Announcement:
Investment
Liberalization
Announcement:
Acquisition of
domestic firm

A
k
m


A
k
m
  v
mm


A
k
m
  v
mm


E
k
m

 0

E
k
m

 0

m

Figure 3.2: Illustrating the evolution of MN E profits under I1 or I2.
Proof. See the Appendix.
Proposition 2 thus sh ows t hat a high strategic value of the domestic assets is conducive
to foreign acqu isitions. A high strategic value is, how ever, no t necessarily associated with
high expected profits. W hen there are severa l poten tial buy ers of the dom estic firm’s
assets, th e Po st-Acqu isition Expected pro fitoftheacquirer,Π
A
(K
m
), will de crea se in α
when I1, I2 or I3 holds. To see this, first note that the acquisition price is a n on -acq uir ing
MNE’s w illin gn ess to p ay, i.e. A = v
mm
. Then, using (2.4) and Assumption A3, w e hav e:
dA
dα
=
d¯π
A
(K
m
)
dα
− p
d¯π
G
(K
m

14
profitasnon-acquirerdecreases (i.e.
d¯π
G
(K
m
)
dα
< 0). C o nsequently, since
¯
Π
A
(K
m
)=
¯π
A
(K
m
) − A,wehave:
d
¯
Π
A
(K
m
)
dα
=
d¯π

d
¯
Π
NA
(K
m
)
dα
=p
d¯π
G
(K
m
)
dα
< 0 (3.3)
We can summarize:
Proposition 3. (i) Under I1, I2 or I3, the Post-Acqu isition E xpected P rofits of all types
of MN Es, including the acquirer, w ill decrease, the more strateg ically valuable the domes-
tic assets are. (ii ) A t a sufficiently high strategic va lue, α>α
∗∗
, th e Post-Acquisition
Expected Profits of the MNEs will fall below their co rrespondin g P re-a cq u isitio n E x -
pe cted Profits(i.e.I1orI2willhold).
Proof. See the Appendix.
Note th at when there a re no externalities exerted on rivals associated with an ac-
quisit io n, en try will become more profitable, the m o re valuable the domestic assets are.
Consequently, it is the fact that there are several potential acquirers present, and that
the acquirer will use the domestic assets competing against the other potential acquirers
in a n oligopoly-interact io n, that drives th e result in the proposition.

en try an d Π
E
(k
m
)=0if not. We shall here comp ar e the Post-G r eenfield Profits of the
acquirer, Π
A
(k
m
) to those of a successful greenfield entrant, Π
G
(k
m
).UnderI1,I2orI3,
15
the a cqu isition price is A = v
mm
=¯π
A
(K
m
) −
¯
Π
NA
(K
m
) an d thus:
Π
A

risk, bu t the value of a voiding this risk is incorporated in the acquisition price. Therefore,
the Post-G r eenfield Pr ofit for the acquirer tends to be lower than the Post-Greenfield
Profit for a s uccessfu l green field entrant. However, both types of firms also face a market
risk, since the r ealized product m arket profit, π
h
(k
m
) is given from a particular realizat io n
of the number of successful greenfield en trants, N
m
, and ma y therefore differ from the
expected product market profit, ¯π
h
(K
m
).Howsensitiveafirm’sproductmarketprofitis
to cha ng es in the n umber of competitors will then depend on its position on the produ ct
market, which is directly related to the strategic valu e of the domestic assets, α.This
implies that the Po st-G ree nfield p rofit for the acquirer can be lower or higher than that
of a successful greenfield entrant, depending on their respective product m a rket positions
and t he outcome in the greenfield en try stage.
Makin g use of symmetry, we can deriv e some analytical results. To see this, note
that the mark et risk solely d eterm ines th e first com ponent of (3.4), whic h show s the
difference in realized and expected product mark et profits for the acquirer, whereas
the seco nd term , wh ich shows the difference in expected an d realized product mar ket
profits fo r a successful non-acquirer, is jointly determined from the market risk and the
individual risk faced in g reen field entry. Ho wever, note that if MNEs ha ve symmetric
market shares in the oligopoly interaction, i.e. if k
A
= αk

m
) − G] and
Π
G
(k
m
)=π
G
(k
m
) − G, (3.4) simplifies to:
Π
A
(k
m
) − Π
G
(k
m
)=− (1 − p) [¯π
G
(K
m
) − G] ≤ 0 (3.5)
We th us hav e the following result:
16
Proposition 4. (i) If the mar ket share of a successful greenfield entrant in the oligo poly
in tera ction is the sam e as that of the MN E entering b y acquisition, then the P ost-
Greenfield Profit of an MN E entering greenfield is at least as high as the P ost-Greenfield
Profit of an MNE ente ring by acquisition.

¯
Π
d
(K
m
)=A > ¯π
d
(K
d
)=
¯
Π
d
(K
d
). Moreover, in Section 3.1.1,
we showed in Proposition 3(i) t hat due to b idding competition among M N E s both over
the benefits as an acqu irer - as well as avoiding the negative extern alities a s a non-
acquirer - the acq u isition price, A, was increasing in the strateg ic value o f t he domestic
assets, α. Consequently, we h ave the follo w ing result:
10
See Scherer and Ross (1990).
17
Corollary 1. (i) The stock ma rket value of the selling dom estic firm increases when the
acquisition is announced and (ii) under I1, I2 or I3, th e stock market valu e of the selling
dom estic firm is increasing in the s trategic value o f the dom estic assets.
Let us now turn to the M N E s. To infer the effect on stock ma rket value when the
acquisition is announced, we once more compare the difference in the Pre- to Post-
Ac quisition E xpec t e d pro fit, i.e. we e x amine
¯

Corollary 2. ( i) T he stockmarket value for the acquiring and the non-acquiring MNE ,
respectively, falls when the acquisition is announced under I1 and I2, and increases under
I3 and I4. (ii) The stockma rket value for the acquiring and the non-acquiring MNE falls
when the acquisition is anno unced , if and only if the stra teg ic value of t he domestic
assetsissufficiently high.
Wh at can then be said w h en comparing different types of MNEs? It follows directly
fromProposition1(i)thatnorelativechangeinstockmarketvalueoccursbetweenthe
acquiring- an d non-acquiring M N E s under I1,I2 or I3, since th e bidding competition
among MNEs implies that firms are indifferent between taking on the role as acquirer
and non-acquirer, i.e.
¯
Π
A
(K
m
)=
¯
Π
NA
(K
m
). How ever, under I4, we showed that non-
acquiring MNEs cou ld free-ride, i.e.
¯
Π
A
(K
m
) <
¯

associated with green field entry. H ence, w e have the follo w in g proposition :
Corollary 4. The stock market value of an MNE successfully entering green field, w ould
in th e long run when the greenfield uncertainty h as been resolved, in crease relativ e to the
stock m a rket value o f th e acquirer, if firms are su fficiently symmetric in m a rket shares.
Howev er, we also sho wed tha t firms face a market risk as well since the realized prod-
uctmarketprofit, π
h
(k
m
) ma y differ from the expected product market profit, ¯π
h
(K
m
).
How the market r isk affects a firm’s stoc km ar ket value will then depend on its ex pected
market position in the oligopoly interaction . To also e xam ine the impact o f th e market
risk, we simu lated the m odel using Courno t competitio n with lin ear deman d.
11
In F igure
4.1, it is sho w n h ow the difference in Post-Greenfield profits fr om (3.4), Π
A
(k
m
)−Π
G
(k
m
),
indicating the relative change in stockm arket valu e betw een the acquirer and a success-
ful gr e en field entran t, depends on th e s trateg ic value of the d om e stic a ssets, α,andthe

) > Π
G
(k
m
). Intuitively, in such a case,
11
See the Appendix.
19
4
1
2
3
5
6
7
8
9
10

A
k
m
 
G
k
m


A
k

A
 k
0
N

m
4
1
2
3
5
6
7
8
9
10

A
k
m
 
G
k
m


A
k
m
 

A
 k
0
N

m
Figure 4.1: The linear Cournot model.
the acquirer has a large expected market share, an d therefo re gains more from a price
increase associated with less than expected entry, than does a smaller greenfield entrant.
Let us end this section of stoc km arket effects with som e discussion of the ev ent
study app roa ch. In the ev ent studies it is assum ed th at th e acquisition c om es as a
surprise for the stockmar ket. Ho wever, Fridolfsson and Stennek (1999) arg ue that, if an
efficien t stoc kmark et an ticipate the acquisition, th e new information in the acquisition
announcement is which firms are insiders and whic h are outsiders.
12
Howev er, consider
a situation where the stoc km arket has difficulties in evaluating the strategic value α of
the dom estic assets for the MN E s. Here, the m erg er sh ould come as a p artial su rprise for
the market. The stockm arket effects of the a nno uncem ent will then be more involved,
since the financialmarketmustthenupdateitsbeliefsoftheentrygameaswellasthe
product m ark et. The main effects found shou ld, however, still be valid.
12
Under this assumption t hey show that preemptive m ergers could explain the empirical evidence that
mergers reduce profits and raise share prices. Fridolfsson and Stennek (2000), u sing the same approach,
show the limits of using effects on rivals’ share prices to determine the competitive effect of a merger.
20
If the stockmark et is instead assumed to be perfectly inform ed, the stoc kmark et
effects when the merger is announced will look different. Stock market values should
now c ha nge before the merger ann ouncem ent, for instance w hen the local mark et is
libera lized, since the a cquisition is a nticipated b y the financial m ark et. Consequently,

14
Moreover, the mo tive for pa y ing a high price for importa nt com plemen tarity assets
seems to have been important in several recent large acquisitions. One examp le is th e
bidding competition over Banco do Esta do de Sao Paulo (Banesp a), the seventh-largest
bank in Brazil. I n Novem ber 2000, Banco San tander Central Hispanio (BSCH) won
a controlling minor ity stake in Banespa, in competition with several other large ba nk s,
including its Span ish rival Ban co Bilbao Vizcay a Argentar ia (BBVA). According to B u si-
ness Week (April 23, 2001): “ It cost an astronomical $3.55 billion, but it put B SC H back
on top” (before BBVA - au thors´ comment). The assets of Banespa were considered
strategically valuable as ind icate d by the following qu ote ”An yone w ho can add Banespa
to their existing structu re w ill take a gigantic leap forward,” says Elio D ua rte, director
of institutional relations at the Brazilian subsidiary of Britain’s HSB C Holdings PLC ,
one of the nine banks qualified to take part in the a uctio n.” (Business Week, November
20, 2000). According to Business Week (No vember 20, 2000), this means that ” bidders
will pay a premium not just to get their hands on Banespa but also to stop rivals from
doing so.”
If there is risk associated with greenfie ld entry our empirical predic tion is that, in
the lo ng run when th e greenfield uncertaint y has been resolved, th e share value of a
successful greenfield en trant sh ou ld perform better than th e share value of the acquirer,
if the firms are sufficiently symm etric in the produ ct market. To test this hypoth esis, w e
need to be able to d istinguish between successful and unsuccessful non-acquirers. One
po ssibility would be to use data fro m markets opened u p by an in vestm ent liberalization.
It shou ld then be po ssible to identify the MNE s active in the industry: acquiring firms,
greenfield entran t s, exporters and firms not active in the mar ket.
One poten tial problem with testing the results from this model is tha t M N E s are
t ypical m ulti-product firm s only generating a small fraction of their revenues from the
14
That specificity of assets are important for the acquisition pattern are found in Blonigen (1997). He
finds support for the hypothesis that real dollar depreciations make Japanese acquisitions more likely
in U.S. industries, particular those which more likely have firm-specificassets.

First,theargumentthatanacquisitionispreferablesinceitallowsforanearlyentry
would naturally disappear. Moreover, if ”over in vestment” in greenfieldentrycouldbe
used as an entry deterrin g (p reda tory ) s trateg y, the dom estic assets might be worthless
in the acquisition game. How ever, if the dom estic assets are sufficiently unique and suc h
”o ver investments” are not profitab le, the dom estic assets might actually incr ease in
valu e. To see this, note that the unsuccessful greenfield entrants outsid e option is now
export profit, whic h amounts to less than the expected profit of a potentia l greenfield
en trant. Consequently, their willin gness to p ay may increase and th us, the acquisition
pric e mig ht be highe r in s uc h situa tions.
15
See Norbäck and P ersson (2002).
23