NRS 4040-Discussion: Risk factors in acquisitions.

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Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding risk factors in acquisitions. Each response should have a minimum of 100 words.

Kathleen Carlson

Mar 4, 2021 at 2:55 PM

The concept of risk can be described as “…the variability of possible outcomes from a given investment” (Block et al., 2019). With big investments, large amounts of money are used. When projects are started, risks to them are unexpected outcomes. Our text used the example of Apache Corp., which helped us see that risk is not always straightforward and talking about a dollar amount. “An even greater threat to Apache Corp. is the proverbial ‘dry hole,’ in which millions of dollars are spent only to discover that there is no oil to be found (Block et al., 2019). The disaster of the “dry hole” for Apache is an environmental risk, which is one they unfortunately need to take.

Risk levels can be measured by utilizing the following methods: probability distribution, standard deviation, coefficient of variation or by examining betas. “The smaller the standard deviation, the higher the probability distribution and accordingly the lower the riskiness of the project” (Tanwar, 2015). Utilizing these methods can help a company compare their options and make the best decision.

When companies are facing acquisitions, they should consider unexpected costs associated with the deal, “for example, employee training, rebranding, and new salaries” (Lewis, 2021). They should also strategize in case of unforeseen market disruptions. IN the Deere/Wirtgen acquisition, the American and German-based companies, respectively, face risks of negative cultural effects and the possible lack of communication due to a language barrier. The companies should be mindful of the importance of harmonizing the two different cultures and keeping communication open. If the research and planning are not done ahead of time, the companies risk seeing their full potential.

References:

Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/.

Lewis, M. (2021, February 9). 10 Most Common M&A Risks and Ways to Mitigate Them. RSS. https://dealroom.net/blog/mergers-and-acquisitions-transaction-risks-and-ways-to-mitigate-them.

Tanwar, M. (2015, December 21). Top 3 Methods for Measurement of Risk (With Formula). Your Article Library. https://www.yourarticlelibrary.com/accounting/capital-budgeting/risk-and-uncertainty/top-3-methods-for-measurement-of-risk-with-formula/71861.

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