Abstract
This article is a case study analyzing the valuation process and the timing choice of a corporate acquisition project using a comparison between the net present value rule and the real option method. It seems that when a corporate acquisition project is done under the right circumstances and well executed, this could mean a huge profits and a win-win for shareholders of both the acquiring and the target company. However, in many cases the results of acquisitions turn out to be negative for one, or both of the parties. Actually, this type of investment is characterized by the risk of paying sunk costs especially for the acquirer. For reaching a win-win result from corporate acquisitions, valuation issues and the optimal timing choice play a major role. In this article, the net present value criterion and real options were used to calculate the project's value and optimal timing of investment. We started by calculating the average and the simulated net present value. Then, we used real options approach. The acquisition option was evaluated with the Black and Scholes model (1973). The timing option was evaluated with the binomial model of Cox, Ross and Rubinstein (1979). Our case study suggested that real options can produce more sensible recommendations regarding the acquisition project value and the investment timing than the traditional net present value rule. It also showed the benefits of real options beyond valuation aspects. In particular, the optional way of thinking can help structure discussions between the managers of the targets companies and the acquirers to establish a roll-out plan of the closing process.
