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Study on Application of Real Options in the Reverse Mergers

Author: WangQianFei
Tutor: GuXiuJuan
School: Henan University of Technology
Course: Industrial Economics
Keywords: Real Options Reverse Mergers Value Assessment
CLC: F271
Type: Master's thesis
Year: 2013
Downloads: 39
Quote: 0
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In recent years, with the steady growth of our economy and the continuousimprovement of the capital market, the M&A market has got rapid development andreverse merger has gradually become the important form of enterprise mergers.According to the flush financial statistics, backdoor listings for a total of86companies,67of them have successful backdoor listings,15is still going on, only four are no, fromJanuary2008to December2012. In addition to the government department in themiddle of the action, the enterprise value evaluation is the key to decide whether M&Asmoothly carries on. In the activities of Reverse mergers, shell companies are sogenerally deteriorating that it’s hard to continue as a going concern. If we select themethods to value evaluation method, such as the discounted cash flow method, theassets value method, market comparison method and EVA valuation method, etc, thenthe evaluation results are often undervalued, even may be negative.Chapter1of this article for the front, separately introduces the selected topicbackground, literature review and the research mentality and method. Chapter2introduces the related concepts of real options and reverse mergers and acquisitions, inorder to analyze the differences between real options and financial options, and tocompare the advantages and disadvantages of the IPO. Chapter3introduces the otherpricing method of the basic model, and analyses their advantages and disadvantages inenterprise M&A valuation, to illustrate the necessity of application of option pricingmethod in M&A. Chapter4introduces the basic pricing model of real options, analysesthe parameters’ influences on the option value, and the reverse merger in the valuestructure of a shell company, and reflects the concrete application of real options inreverse mergers combining with the actual case analysis. Chapter5says the real optionvaluation model on the problems existing in the application of reverse mergers. Chapter6puts foreword the corresponding application advice of a real options application inmergers, on the basis of the chapter5.This paper points out that application of real option valuation method doesn’tsubstitute for other pricing method, but a supplement to the method of enterprisevaluation, making the enterprise evaluation tend to be more market value. In theactivities of reverse mergers, the value of shell companies includes shell company ownassets value and option value of the acquirers: the former can use market comparisonmethod and the discounted cash flow method to evaluate; the latter can be evaluated byreal option method, and the two can get more accurate enterprise value.

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