Topic 26

What Is Business Risk?

Risk often is defined as variability measures, such as standard deviation, which are easily measurable. While business risk, particularly in terms of doing M&A, includes variability, it may be more appropriately defined in terms that the operating manager or responsible acquirer can relate to more readily. Topic 26 explores the notion of business risk in mergers and acquisitions (M&A).

BUSINESS RISK IN M&A DEFINED

  • Business risk can be defined as the composite effect of the tendency for actual results to vary (negatively) from expectations, the timing of the occurrence and duration of the resulting impact, and the degree of control possessed to mitigate the (negative) variation.
  • Control is the ability to prevent or limit the effect of the convergence and consequence of events that may, singly or jointly, result in minor, severe, or disastrous negative variation from expectations.
  • Control is what separates managing risk from simply gambling.
  • Negative variation and impact is, of course, the concern and, more often than not, the result in deals (see also Topics 17 and 27).
    • Variation is expressed as the magnitude of return variation and time variation.
    • Return variation is the extent to which actual returns are less than expected (negative impact).
    • Time variation is the extent to which returns are realized later than expected and continue longer than expected.
  • The level of necessary control is expressed relative to the amount of potential variation ...

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