M&A Value Assessment Study Bases On Real Option Theory

Value assessment is a very attention-getting topic in M&A research. However, M&A is not always successful, the failure of M&A cases abound. The key of M&A can achieve the desired success or not depends on a reasonable assessment of the enterprise target value. Make a reasonable and feasible transaction value is a key to a successful M&A.Discounted cash flow method often underestimate the value of investment projects, thus bases on this method, decision-maker often make a Short-sighted investment decisions, so that enterprises lose the competitiveness. It is proved that enterprise evaluation approach bases on Discounted Cash Flow approaches (DCF) is usually hard to be used in Chinese M&A. Plus, M&A is a long-term strategic investment, not only has the irreversibility as general investment projects, but also has high-risk, high-yield characteristics, and M&A has more management flecibility and uncertainty, with the typical characteristics of options, real option theory is more suitable in evaluating the investment. DCF and other traditional methods often pay attention to the losing it makes but easy to neglect the value it includes.In this paper, we will review the theories of M&A and Real Option, analyze the source of the value and the R.O(Real Option)character in M&A, and develop a M&A decision-making framework bases on real option theory combine the actual decision-making needs. Considering the actual condition of our country, takes the stock price as underlying asset may distort the actual option price. In this paper, we make a demonstration analysis on net asset value distribution, it is proved that the net value of assets subject to lognormal distribution. We think, take the net asset(NA) as underlying asset is more correspond with the actual condition. Basing on this framework, we apply this method to a public company case to checkout its feasibility.