real options analysis in mergers and acquisitions

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1、5RealOptionsAnalysisinMergersandAcquisitionsCHANDRASHEKARKRISHNAMURTIANDVISHWANATHS.R.CHAPTEROBJECTIVESIntroducesrealoptionsanalysisasanalternativetotheDCFmethodologyOutlinesthedifferenttypesofrealoptionsHighlightsthetypesofrealoptionsencounteredinmergersandacq

2、uisitionsAnoptiongivestheholdertheright,butnottheobligation,tobuyorselladesignatedassetatapre-determinedprice.Acalloptiongivestheholdertherighttobuytheunderlyingassetbyacertaindateforacertainprice.Aputoptiongivestheholdertherighttoselltheunderlyingassetbyacerta

3、indateforacertainprice.Thecontractpriceisknownasstrikepriceorexerciseprice;thedateinthecontractisknownasexpirationdate.Americanoptionscanbeexercisedatanytimeuptomaturity,whileEuropeanoptionscanbeexercisedonlyatmaturity.Optionscanbefurtherclassifiedintofinancialan

4、drealoptions.Whentheunderlyingassetoftheoptioncontractisastock,astockindex,aforeigncurrency,adebtinstrumentoracommodity,itistermedasafinancialasset.Theunderlyingassetinthecaseofarealoptionisarealasset.116CHANDRASHEKARKRISHNAMURTIANDVISHWANATHS.R.Mostcompaniesimp

5、licitlyholdrealoptions.Theexampleofabusinessthathastheoptiontodefertheinvestmentisonetypeofrealoption.ThefirstaccountofarealoptionisfoundinthewritingsofAristotle.1Thales,asophistphilosopher,divinedfromsometealeavesthattherewouldbeabountifuloliveharvestduringthef

6、ollowingseason.Heboughttherighttorentoutolivepressesfromtheownersofolivepressesforanormalrent.Whenthebountifulharvestarrived,othersdidnothavethepressingcapacity.So,Thalesrentedoutthepressestothematanabove-marketrateandpocketedaprofit.WhatThaleshadpurchasedisanop

7、tionbutnottheobligationtorentoutthepresses.Iftheharvestweretobepoor,hecouldhavesimplywalkedawaylosingjustasmallpremiumintheprocess.RealOptionsinCorporateFinanceThetermrealoptionswascoinedbyProfessorMyersofMIT,inanarticlepublishedin1984.Inhiswords:Strategicplann

8、ingneedsfinance.Presentvaluecalculationsareneededasacheckonstrategicanalysisandviceversa.However,standarddiscountedcashflowtechniqueswilltendtounderstatetheoptionvalueattached