brownfield-investment

What Is A Brownfield Investment? Brownfield Investment In A Nutshell

A brownfield investment normally occurs when an organization wants to begin operating in a new country without incurring the expensive start-up costs associated with a greenfield investment. For the purposes of this article, a greenfield investment is one where a new production facility is constructed from scratch.  A brownfield investment is the lease or purchase of a pre-existing production facility in a foreign country.

Understanding a brownfield investment

A brownfield investment is a form of foreign direct investment which makes use of existing infrastructure by either merging, acquiring, or leasing that infrastructure. That is, the foreign company or individual invests in a business already established in another country. For the business entering a foreign country, this approach reduces costs and shortens the time to production.

While a brownfield investment is a low-cost, developed asset, it may still require ongoing capital expenditure. Many brownfield investments are associated with considerable development or construction as part of expansionary, enhancement, or retro-fitting programs. 

Brownfield investment examples

To understand how a brownfield investment plays out in the real world, consider these examples:

Vodafone

The British telecommunications company acquired a majority stake in Hutchison Essar, India’s fourth-largest mobile operator. The multi-billion investment saw Vodafone gain a controlling interest in the company. In the process, Vodafone established itself in the Indian telecom market through an established player.

Tata Motors

Indian automotive manufacturer Tata Motors acquired fellow British manufacturer Jaguar in 2008. The all-cash deal, worth $2.8 billion, gave Tata the right to establish a manufacturing plant and two design centers in the United Kingdom. 

Disney

In 2006, The Walt Disney Company acquired computer animation studio Pixar in a deal worth $7.4 billion. In acquiring Pixar, Disney gained access to advanced animated movie technology. The company also inherited Pixar’s unique culture and creative team, which it admitted was responsible for “some of the most innovative and successful films in history.

Advantages and disadvantages of brownfield investments

Advantages

Quick access to a new market

Since much of the infrastructure is already provided, the company can enter a foreign market in a relatively short space of time. What’s more, the existing firm may have an established network of vendors, suppliers, and distributors.

Regulatory approvals

Similarly, an existing firm with environmental or bureaucratic approvals in place means the acquiring firm can begin operations sooner and save time and money. This advantage is likely to grow over time as environmental approvals become increasingly difficult to obtain.

Skilled employees

As we saw in the Disney acquisition of Pixar, some brownfield investments allow the controlling company to benefit from a skilled and productive workforce. In fact, it may be the sole reason a company makes such an investment in the first place. 

Disadvantages

Outdated infrastructure

There is always the risk that a brownfield investment requires a major infrastructure upgrade. In some cases, the cost of the upgrade may be comparable to the cost of a greenfield investment.

Repatriation laws

Some countries impose restrictions on how much profit can be taken back to the home country of the acquiring company.

Buyer’s remorse

No matter how good the investment appears on paper, it is unlikely the acquiring company will find a facility with the type of capital, labor, equipment, and technology that suits its needs completely. The discomfort arising from buyer’s remorse must be prepared for and accepted if the business is to succeed in a less than ideal foreign market.

Key takeaways:

  • A brownfield investment is the lease or purchase of a pre-existing production facility in a foreign country. Many such investments are associated with expansionary, enhancement, or retro-fitting programs.
  • An example of a brownfield investment is the Vodafone acquisition of Hutchison Essar to enter the Indian telecommunications market. Another example is Disney, which acquired Pixar to inherit its advanced computer animation studios and a team of creative designers.
  • Brownfield investments may help an organization enter a new market more efficiently with regulatory approvals, infrastructure, and a skilled workforce in place. However, there is a risk the acquired infrastructure is costly to maintain or replace. Some countries also enforce restrictive profit laws.

Main Free Guides:

Connected Financial Concepts

Business Incubator

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business incubator is an organization that helps start-up companies or entrepreneurs develop their businesses. Assistance usually takes the form of dedicated office space, management training, and venture capital funding. According to the National Business Incubation Association, there are more than 1,400 incubators in the United States.

Angel Investing

angel-investor
An angel investor is usually a high net-worth individual who invests in early-stage start-ups in exchange for equity in the company. Angel investors are wealthy private investors focused on financing small business ventures in exchange for an equity stake. Unlike a venture capital firm, an angel investor invests their own capital during the early stages of a start-up when the risk of failure is relatively high, yet it might in the long-term unlock higher rates of return.

Venture Capital

venture-capital
A venture capitalist generally invests in companies and startups which are still in a stage where their business model needs to be proved viable, or they need resources to scale up. Thus, those companies present high risks, but the potential for exponential growth. Therefore, venture capitalists look for startups that can bring a high ROI and high valuation multiples.

Economic Moat

moat
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Meme Investing

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Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Payment for Order Flow

payment-for-order-flow
Payment for order flow consists of a “kickback” or commission that the broker routing customers to a market maker (in charge of enabling the bid and ask price) will pay a commission to the broker as a sort of market-making fee.

What is a SPAC

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A special purpose acquisition company (SPAC) is a company with no commercial operations that are created to raise capital through an IPO to acquire another company. The SPAC is also called for that reason a “blank check company” as it will use the money provided by investors to enable private companies to go public via the SPAC.

Pac-Man Defense

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The Pac-Man defense is a tactic used by a company that is the subject of a hostile takeover. The Pac-Man defense is a response to a hostile takeover attempt with another hostile takeover attempt. In essence, the company that was the subject of the original takeover turns the tables on the acquiring company by trying to take it over in turn.
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