A Application Of Real Options In Valuation Of Mergers And Acquisitions

In order to achieve long-term development or growth, the enterprise must have along-term strategic vision and strong competitiveness, while the mergers andacquisitions as an important way of resource reconfiguration, it is an important meansof achieving goals for the enterprise. The value evaluation methods of target enterprisein M&A mainly include costing method, market comparison method and discount cashflow method. Due to the merger and acquisition is a kind of highly uncertain investmentbehavior, the value including strategic acquirers expected synergies created byacquisition or other interests, and when calculating the value of this part, the traditionalmethods is somewhat out of puff. As a kind of investment, M&A has the characteristicsof real option. Therefore, the real options theory can be applied to valuation process ofmergers and acquisitions, making a reasonable evaluation price of M&A.From the perspective of value composition in enterprise M&A, the article pointsout that the value of mergers and acquisitions including two parts: the static value anddynamic value. Then the article theoretically analyzes the necessity of using real optionsvaluation methods to assess the value of M&A, and further determine Geske model.Through the analysis of the option value driving factors in the case of exclusive andnon-exclusive, the article put the competitive factor into the options pricing model, andusing the factor analysis method to quantify the intensity of competition coefficient.Finally, a case of M&A in the environmental protection industry illustrates the Geskemodel in practical application.The conclusions of this study are following: first of all, compared with thetraditional evaluation method, the real option method has an advantage in evaluating theflexibility and uncertainty value of M&A. Secondly, due to the compound optioncharacteristics of M&A, choosing the Geske model will be more applicability. Third,the nature of non-exclusive and preemptive of real option decide the existence ofcompetitive, and the ability of obtaining the option value depends on its position in theindustry competition, the stronger of the competitiveness, the greater of option value,but compared with the exclusive environment, the overall value of the options issomewhat decreased.