I would now like to explore the concept of “Business Events,” particularly their affect on company risk. First things first, let’s define risk. The traditional definition of risk is a company will be unable to make the required payments on its debt obligations. This, of course, is a narrow financial definition, and if you’re a lender that’s probably exactly what you care about. If you’re a supplier, on the other hand, you probably view risk in a larger scope; for example, is your customer having financial difficulties and will he demand to renegotiate payment terms on a more extended basis, renegotiate pricing in a downward direction, reduce his order commitments, and so on? Furthermore, although many risk models have a 1-2 year horizon, a short-term view is also needed, and web-data can be used in that short-term (1-6 month) context.
Regardless of whether you’re a lender, supplier, analyst or salesperson, here are some events that negatively impact the growth behavior of a company, and that can be mined from web-data in a very updated manner:
- Litigation: When a company starts to have cash flow problems, one of its first reactions is to delay payment to some suppliers. At some point, payment delinquency moves from the “tolerant” stage to the litigation stage. But what happens if you’re modeling the risk of a company and do not have access to their AP/AR data? How do you recognize litigation without waiting for it to possibly appear in a financial report? Fortunately, there are fee-based web-based sources that detect and track litigation including LexisNexis, Public Access to Court Electronic Records (PACER), and D&B. Publicized litigation that has made it into the media can be obtained at little or no direct cost, and recent (2010) examples of major litigation include BP, Microsoft’s suit against Salesfore.com (patent infringement), Borg-Warner (asbestos product liability), and Chrysler (failure to pay suppliers). Of course, the above companies are large enough to withstand the litigation payouts to avoid default; but what does this do to their sales & marketing budget and supplier terms? In our more expanded view of risk, these are important topics!
- Analyst Recommendations: Analyst recommendations often, and quickly, affect a company’s stock price. Downward recommendations that cause the stock to fall, place pressure on the company to compensate. A typical reaction is to cut expenses in order to boost earnings. Of course, this action does not bode well for the company’s S&M efforts, or their suppliers.
- Partnerships: Partnerships usually indicate positive growth activity, and by logical extension, lower the company risk.
- M&A: M&A logically reduces the target company’s risk. Although M&A (and even its announcement) should immediately change the risk score of the target company, this is usually not the case, since the scoring models have no way of quickly recognizing the event.
- Key employee movement: When a company hires a heavyweight Senior executive, it is invariably a growth move, which should lower risk (otherwise they would likely not take the new position).
- Insider trading: The purchasing of shares by insiders is often a leading indicator that they expect the stock will go up in the near future (which is itself a leading indicator that the company will expand due to its increased market cap)
- Product introductions: A new product introduction is typically a leading indicator of growth, hype, success, and similar; these are all leading indicators that reflect a lowering of risk.
- Product recalls (pharma): At a minimum, product recalls offer a negative distraction to sales. Sometimes, for example in the Pharma sector, recalls can have a devastating affect on sales. Sometimes, for example in the auto industry, they may have a more temporary affect. But in either case, they diminish the strength of a company.
- Financial announcements: Financial announcements are excellent leading indicators, on the upside and downside. They appear on the Internet well before they appear in the financial statements that are used to drive typical company risk models. Competitive tracking: Significant changes in competitive activity greatly affect market potential models, and could well affect risk models.
- Competitive monitoring becomes increasingly important in economic downturns, since supplier loyalty is overshadowed by the customer need for cost reductions. Generally speaking, as direct competition grows, it becomes more formidable to deal with, and the competitive events including product, financial, employment, and so on should be quantified and incorporated into both risk and marketing models .Whew! Now that we are all caught up on Business Events, check back for the third and final post of the series that will tie everything together.
Check back in a couple of days for Part 3: Using Web Mined Data to Enhance the Performance of Business Risk and Opportunity Models
Please contact me with any questions or comments. I can be reached by commenting on the blog, or via email at Steve (at) digitaltrowel.com