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Abstract
Mergers are one of the popular topics in business today, since they characterize the new economy: pressure of global competition, development of technology and disappearance of country boundaries. ... On the other hand, real options create value with the help of the ability to react to an uncertainty. The process of acquisition of corporate control can have two real options associated, a waiting option and a growth option. ... In this paper I try to understand the concept of real options pricing on corporate acquisitions. ... Introduction
Real options analysis extends financial option theory to options on real, or non-financial assets. A company that has a real option has the right but not the obligation to make a potentially value-accretive investment.
The literature of real options starts with the papers of Myers (1977), Mac Donald and Siegel (1984,1985,1986), Dixit and Pyndick (1995). This literature explores the analogy between financial options (calls and puts) and the flexibility every investor has to respond to changing conditions of the business environment. The basic real options described in the literature are the waiting option, the growth option and the independent option. ... Growth Option
In this real option, the investor reacts to good states of the nature by scaling up investments. ... The analogy with financial options comes associated to the call, which can be explained with the help of the following graph. ... Analysis of real options in the process of acquisitions
I consider a risk neutral investor assessing whether to invest Ic = I 1 + I 2 in the corporate control of a firm. ... The sequence of events can be depicted in the following figure:
where the net payoff associated to the project is:
Expected Net Present Value = - I1 + {Fi + Max [Fi - I2 + Max (E(Ki )* Fi/r - Ik, 0), 0]}/(1+r)
The maximum function allows us to eliminate all the negative payoffs, reflecting the flexibility associated to the real options.
Approximate Word count = 1355
Approximate Pages = 5.4
(250 words per page double spaced)
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