Research On Real Option Model In Evaluating The Expected Synergy Effects Of M&A

Merger and acquisition has been in existence over one hundred years. Under the force of market, tens of thousands of enterprises have accomplished the goal of leapfrog development by M&A. With the development of technology, high-tech enterprises have emerged rapidly in the past decade. In the meanwhile, the M&A of high-tech enterprises have also occurred frequently. Due to its own characteristics, high-tech enterprises have great growth and uncertainty value. However, the traditional method, DCF, has disadvantages in appraising the uncertainty, flexibility and growth value of target enterprises. The appraisal result of DCF cannot reflect the value of target enterprises adequately. On the contrary, real option, based on the probability theory, is able to cover the shortage of DCF. It becomes the effective supplement of valuation method and provides more exact evaluation scheme for management’s investment decision.By connecting synergy effects theory with real option theory, the paper considers that synergy effects created by M&A contains option value, which is able to use the option model to measure. First, the paper demonstrates that the uncertainty of synergy effects is consistent with property of the real options and the applicability of Black-Scholes model in evaluating the synergy effects. Second, the paper introduces a M&A case to discuss the practicability and effect of real option in valuating expected synergy effects. In the case study, the paper analysis the merger motivation and synergy effects with synergy effects theory at first. Then, the paper applies real option theory and DCF to estimate the expected synergy effects of the case. At last, the paper gives the reasonable transaction price of the case. In addition, the paper finds that the volatility rate used in previous studies has certain subjectivity and insufficient. In order to mend the deficiency, the paper utilizes GARCH(1,1) model to calculate the twin securities volatility rate.The research results show that real option can estimate the scale of the expected synergy effects properly. It is more accurate to appraise the value of high-tech enterprises combining DCF with real option. Finally, the paper put forward the following promotion suggestions: On one hand, it can strengthen the accuracy of real option results by increasing market efficiency through the improvement of financial market system. On the other hand, it can reduce the price risk,caused by information asymmetry, through the improvement of the information disclosure mechanism.