Topic 27
Entropy: Tendency toward Negative Variation
Topic 27 explores the notion of entropy in M&A deals: things tend to go wrong, and negative variation from expected returns often occur. Entropy may be one of the reasons why there is a tendency toward negative variation.
ENTROPY DEFINED
- The Second Law of Thermodynamics is an expression of the universal principle of decay observable in nature. It is measured and expressed in terms of a property called entropy.
- Entropy is “the tendency for all matter and energy in the universe to evolve toward a state of inert uniformity.” Entropy is the “inevitable and steady deterioration of a system or society.”1
- Entropy is also defined “as a measure of unusable energy within a closed or isolated system (e.g., the universe). As usable energy decreases and unusable energy increases, entropy increases. Entropy is also a gauge of randomness or chaos within a closed system. As usable energy is irretrievably lost, disorganization, randomness, and chaos increase.”2
- Generalizing, left to itself without outside assistance, an isolated system tends toward a state of energy loss described as entropy.
ENTROPY IN M&A DEALS
- Perhaps, then, there is an irreversible loss of effectiveness when all the elements of a business (particularly after a deal) are brought together in an ongoing fashion and left alone without continuing outside assistance in the form of leadership, management, accountability, and correction processes.
- This tendency toward disorder, ...
