The Application Of Real Option For Valuation In Merger And Acquisition Of China

The valuation of target enterprise is a crucial step in M&A procedure, and always full of risk. The uncertainty in M&A is suitable for the application of Real Option. From the perspective of Real Option, The paper developed a new kind of valuating method: the value of target enterprise constitutes the value under the traditional valuating paradigm and the value originating form the option. The paper expounded five remarkable characteristics in M&A :Uncertainty——the circumstance for market and governmental policy is dynamic; deferred——the decision for M&A can be postponed for sometime in order to reduce the risk; amendable——phasing the investments, the sponsor can expand or shrink the scale of investment; reversible——the sponsor is entitled to suspend or cancel the whole investment; derivative——M&A can provide a kind of developing platform through optimization of the resource. Moreover, the paper put forward two fundamental principles for identifying the options embedded in M&A: sufficient and dominating, the former of which emphasizes the richness of options; the latter of which emphasizes the special type of Real Option. Then, the paper introduced the Binomial Model for valuating option, which is recommended for its adaptability and furthermore is demonstrated through a simulated case. The paper had two major parts: the foreword; the text comprising five chapters. The forewords put forward the subject for valuating corporate value after analyzing the Top ten M&A events of China in 2004. The first chapter expounded the notion and synergetic effects of M&A and introduced the researching area of this paper; the second chapter analyzed the traditional methods, bringing out the Real Option method; the third chapter expounded Real Option theory and five remarkable characteristics in M&A; the fourth chapter brought out the principles for option identification and provided a case based on binomial model; the fifth chapter was the conclusion and analyzed the challenges of the application for Real Option in China.