The Application Research Of Real Option Method In A Company's M&A Pricing

With the continuous development of economic globalization,the corporate mergers and acquisitions activities occur more frequently.M&A is an important way to integrate and optimize the enterprise resource.Meanwhile,the M&A increase the competitiveness of Chinese companies and boost China's new economic growth.Especially in recent years,the corporate mergers and acquisitions have played a significant role in Chinese social and economic development.Through mergers and acquisitions transactions between different corporations,the country's supply-side is capable to decrease the inventory,the capacity in industrial and financial leverage of the corporation.Furthermore,M&A can improve the industrial transformation,technology upgrading and promote the development of strategic emerging industries.Meanwhile,the M&A would support the state-owned enterprises to achieve a better performance related to the national poverty alleviation strategy.The Belt and Road initiative will serve as a new platform for all companies improving the cooperation competitiveness in the world and promoting the development of the national economy in favorable way.One of the core elements of the mergers and acquisitions transaction is the valuation of the target company.The rationality of the valuation of underlying asset would affect the result of the mergers and acquisitions transaction directly.Currently,the common methods of the corporate valuation,such as discounted cash flow method,are rigid.They fail to take the consideration of the value of option from the uncertainty of the mergers and acquisitions transaction.Therefore,traditional valuation methods sometimes fail to evaluate the value of the underlying assets adequately,misleading both parties to make wrong decisions,even losing investment opportunities.Applying the theory of real options in the M&A transactions to value the underlying assets can compensate for the lack of applicability of traditional valuation methods in the case of uncertainties.The real options emphasize the value of flexible and strategic management that may bring a new perspective and other modes of thinking to help the enterprises recapture opportunities,reduce risks,and create value.The real option method applied to the valuation of the underlying assets in the M&A activity is based on the value of the future option in the underlying asset.When the real option method is used to evaluate the underlying asset in the M&A activity,the value of the underlying asset is divided into two parts—the actual value of assets and the value of investment opportunities.The valuation of real assets includes the value of the company's existing assets under current conditions,while the value of investment opportunities is also the option value of the underlying assets.We first evaluate the value of these two parts separately,and then combine the sum of the two parts to get the total value of the target company.This paper introduced the theory of real options systematically,and further analyzed the rationality,applicability,and operability of the theory of M&A transactions valuations.On the basis of theoretical analysis,this paper mainly adopted the method of case analysis applying on the target company,for instance,K Company whose equity was fully acquired by A Company.The case provided an illustration for the real option applications to prove its feasibility on the M&A transaction valuation.Finally,this paper discussed the possible problems and limitations of the real option method in the practical application.