Running the Gamut of Risk-Taking

Evaluating growth through acquisition, product line expansion or entering a new category entails reviewing both the economic and strategic value of the new undertaking. Of course, financial analysis begins with good financial modeling tools. Assuming that the potential return is attractive, the second important element is risk. Risk can range from an insignificant investment to betting the farm. Certainly, no one wants to lose money, even on an insignificant investment; however, this is certainly preferable to losing the farm. One must be very realistic about the condition, value and potential of the farm that is being bet. In the earliest days of our business, we took substantial risk relative to our size , because there was little to protect. As we have grown and become more successful, our willingness to accept risk has diminished.

If the potential future financial return is not immediately borne out by the numbers , then strategic value becomes paramount, particularly as it pertains to acquisition. In this regard there are two elements to consider, strategic benefit and strategic risk. Strategic benefit can include such considerations as the acquisition of important intellectual property or the maintenance of margins by removing a price-eroding competitor. Strategic risk, which involves evaluating the potential impact of another company making the acquisition, is generally a bit harder to assess. Nonetheless, it must be part of the deliberations to obtain a complete picture of the value of the potential acquisition.