Executive Summary of M&As with Real Options

The effectiveness of mergers and acquisitions (M&As) has been acknowledged and they have been used as a growth strategy option, but the results have not always been satisfactory. If the top managers could use real options, M&As would be easier and more successful. That is, writing real options on the company’s idle assets, inefficient projects and subsidiaries would suffice to meet the cash needs for the M&A. While buying real options on the target company’s assets, promising projects and subsidiaries would give advantages to the merging or acquiring company. Real options would bring the top management enough time and money to succeed in the M&As. What is more, using real options leads to successful management after M&As, which is the most important factor in the M&A strategy option. That is, the merging or acquiring company could write real options on the redundant businesses of the merged or acquired company and divest them of their redundancy later. In evaluating the target company, real option ways are far more effective than existing evaluation methods, because they focus on the future cash flows instead of assets, liabilities and stock prices, which have some problems in their evaluation. They could induce the whole industry to select the M&A strategy option. Effecting M&A business models with real options is a disruptive innovation in the managerial strategy options. Most old economy companies need an innovative business model if they are to grow in the future. If they used M&As with real options, they could change their old-economy businesses into businesses that are competitive in the new economy. Companies that are already structured for the new economy can grow easily and successfully through using M&As with real options.