Real Options In The Application Of The Merger Synergies

After reform and opening up, the exclusive monopoly of China’s state-owned retailenterprises had been broken, establishing the coexistence of diverse forms ofownership. So far, China’s retail industry basically finished the first stage of theindustry and showed a flourishing market.In recent years, after a brief waiting owing to the remaining shadow of the financialcrisis, the retail industry is undergoing rapid development by means ofmergers and acquisitions, which become the most important forms of the industryintegration of investment, with the business confidence and strength improved. Basedon such conditions, the retailers attempt to join the competition through M&A. It isthe key factor that making correct evaluation of synergy effect so as to provide basisfor trade price will contribute to carry out successful merger.In the uncertainty circumstances, strategic M&A is a high-risk and irreversibleinvestment. However, compare to real option method, traditional discounted cash flow(DCF) method with different principles cannot satisfy the uncertainty circumstances.Therefore, the paper attempted to introduce real options theory and method to theinvestment appraisal of venture capital.This paper mainly discusses the pricing model of synergy effect in the purchasing. Byanalyzing the essential implication and characteristics of synergy effect and realoption, it expatiates on the real option model based on implied synergy effect.Meanwhile, DCF model is applied for appraising the valuation of explicit synergyeffects. A further study is made to employ the two models to value the reasonablepricing of a target firm. At last, this paper intends to illustrate the real option methodthrough the case study of M&A pricing of Xindaxin to examine its value, in order tofind a effective way to the reasonable pricing of China’s retailing M&A.