EACC: Real Options on M&A
Case 1: The Value of a Company with an Option to
Firm Z is facing the chance to expand its business. Currently, the value of the
assets in place of this company is e18M. The company has the chance to expand its
business in 30% with an investment cost of e4M. The volatility is 20%, the dividendyield is 6% and the risk-free rate is 2%.
1. What is the value of this company?
2. Describe, based on the real option approach, what are the characteristics of the
Case 2: The Optimal Timing for Merging I
Firm C is facing the chance to acquire Firm D. Consider the following information
about this operation:
Expected value after the ...view middle of the document...
Based on the collected
information they estimate that the volatility of the value of the synergies is similar to
the volatility of the company’s stocks (portfolio). The managers of both companies
have been postponing the decision to merge, waiting for the optimal timing, mainly
because the outcome is uncertain and the merging costs are signiﬁcant and irreversible.
Based on the available information, can you help them?
Market value of SSSONAECOM
Market value of ZZZON
Volatility of SSSONAECOM shares
Volatility of ZZZON shares
Expected merging costs (consultancy, legal costs, integration costs, ...)
1. Find the optimal timing for merging, i.e., the level of synergies for which is optimal
2. Perform a sensitivity analysis to the volatility parameter;
3. Analyze the eﬀect of a ”golden parachute” of e8M on the timing of the merger.
Case 4: M&A to Acquire New Technology I
NNNokkkia, a company acting in the mobile phone industry, decided to make an oﬀer
to buy a company that has expertise about the development of new long-lived batteries.
The goal is to control a new technology taking advantage over the competitors. The
target company has already started the the research phase (e1M have been already
invested) which will last for two more years. For supporting the remaining research
period the company needs to invest now e1.5M more. After the R&D period the
product can be patented and the company can start producing and commercializing it,
if the market conditions reveal adequate. The production facility has a cost of e4.5M
and the present value of the expected cash ﬂows is e6M. However, the uncertainty
surrounding the project is signiﬁcant: the ﬁrm estimates a...