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“This is potentially a type three acquisition where both the firm’s exposure to business risk and financial risk change”.
Business risk – is there a change in business risk since both companies are in the same industry (petrochemical) ?
Financial risk – is there a change in financial risk sinve question has mentioned that the acquisition would not have a significant impact upon the company’s credit rating ?
With regard to the business risk, although they are both involved in petrochemicals, one of them is more involved in the selling of petrol chemicals whereas the other is more involved in drilling. Also their businesses are involved in different parts of the world. For these reasons, the business risk is likely to be different.
With regard to financial risk, this is not directly to do with credit ratings. Financial risk is the risk to shareholders due to the level of gearing in the company. The two businesses have different levels of gearing.
Hi Sir
This qns mention type 3 of acquisition, may I know where should i read up on the different types of acquisitions? Thanks
to add on to the business risk , am I right to say that after acquistion their average asset beta is likely to change therefore business risk will change?
The different types of acquisitions are described in the chapter in our free course notes on acquisitions. If you want more, then there is your Study Text, or if you Google you will find more.
Your last post is correct, but the wrong way round! The level of business risk is likely to change, and therefore the asset beta will change (the asset beta measures the level of business risk).
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