Research On The Applicability Of Real Option Model In COFCO Real Estate’s Acquisition Of Joy City Real Estate

In mergers and acquisitions,the core issue that participants are most concerned about is the pricing of the underlying assets,and the rationality of pricing depends on the selection of valuation methods.At present,most M&A are based on traditional valuation methods which overly rely on financial statements ignoring the synergistic benefits after M&A.Besides,the market environment and the element of subjectivity in assessment also affect the accuracy of the results.Thus promising and profitable projects may be missed by management.Reasonable M&A valuation enables the pricing to return to its actual value,which can effectively improve the decision-making returns of M&A and provide valuable decision-making basis for management.This dissertation found that management can adjust M&A strategies at any time based on changes in the internal and external environment of the enterprise: when the market performance of the underlying asset represents the conditions management expects,the acquiring company will advance the transaction process accordingly,and increase the investment scale to maximize profits if necessary;If the external environment varies and the integration is not positive,the acquiring company may suspend or delay the M&A,reduce investment,or even abandon the project and package it for sale.By adjusting and changing strategic decisions,the management can not only grasp potential investment opportunities,but also avoid certain operational risks.These variable operating strategies are not designed artificially,they are attached to physical assets with highly uncertain value and returns.They belong to typical real options whose value cannot be ignored while being assessed.The research findings based on the relevant basic theories of M&A and value evaluation lead us into the real option pricing model combined with the traditional M&A valuation methods by summarizing the previous research conclusions using the normative analysis method.B-S and binary tree real option models were applied on account of M&A between COFCO Real Estate and Joy City Real Estate to evaluate the underlying assets on the benchmark date with the motivation and process deeply analyzed.Sensitivity analysis and verification on the evaluation results were conducted to compare them with traditional valuation methods and explore the value of promoting the real option model.