The Application Of Real Option In The Evaluation Of Merger And Acquisition

Merge and acquisition (M&A) is an important and effective way for enterprises to expand. It is not only the result of the highly developed market economy but also the objective need for all sorts of enterprises to make developments and profits. Purchasing shell corporations is a vital operational method. By this way enterprises can enter the capital market directly and expand themselves rapidly. After making the M&A decisions by strategic needs enterprises should evaluate the target corporations.There are mainly three evaluation methods: Discounted Cash Flow Method, Relative Comparables Method and Option Pricing Method. Real option is a method using option pricing model to appraise assets with option characteristics and it perfects the evaluation theory. When the traditional DCF method is not or hardly suited it can get the ideal results by specific ways. It has a broad prospect in all problems with option characteristics. But at present the market has not approved the flexibility and the value of future opportunities. It relies on the development of economy, market and the change of concepts. The paper is composed of five chapters. The first chapter introduces the theory of M&A, including the main forms, motives and features, pointing out the problem of evaluation. The second chapter briefs two traditional methods and their limitations. The third chapter presents the theory of real option method and two kinds of pricing models. The fourth chapter is the key part. It covers several applications of Black-Scholes model and analyses the case of purchasing shell corporation (600633). The fifth chapter looks forward to the prospect of the application of option method.