L Finance in a Sense, a Foreign

¶ … l Finance

In a sense, a foreign acquisition target is assessed in much the same way that any other target would be, but the specifics of the evaluation may differ. All acquisitions must be priced, and this price needs to take into account all of the different risks. The difference with foreign acquisitions is that the risks are going to have different weights. For example, there is little incremental political risk involved in a domestic acquisition, but there is with an international one. Sometimes, there is a lot of incremental political risk. Foreign acquisitions will typically involve foreign exchange rate risk, to a higher degree than the firm currently faces. Post (2006) notes that there are often risk premiums associated with foreign acquisitions, and these risk premiums can increase the price and reduce the return

So because the risk profile of international acquisitions is different, the hurdle rate for such acquisitions is going to be higher -- there is still a hurdle rate, but the inputs to that hurdle rate change. So while the basic mechanics of assessing a foreign target are the same, there are differences between international and domestic acquisitions that will be accounted for in the numbers, so that there are clearly going to be different in terms of the things that are taken into account, and how much attention is paid to each issue.

2.

A real option is a choice that a business might have with respect to a real asset. A company might contractually have a right that it can exercise with respect to a given asset. There are a number of different situations in which this could occur. For example, a company might lease a piece of equipment but have an option to continue the lease should the business go well.