Real options’ role in M&A: from theory to practice

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi
dc.contributor.advisor Puttonen, Vesa Patteri, Miikka 2017-02-14T08:50:52Z 2017-02-14T08:50:52Z 2016
dc.description.abstract Purpose of the study According to theory of real options’ role in M&A, an acquiring company can gain value by enhancing the target company’s real options by lowering their exercise price, increasing upside potential of cash flows and allowing for improved timing of exercise or by seeking targets where real options’ value is available to a specific acquirer. This theoretical value creation potential should drive companies to seek targets with a large amount of their value attributable to real options. This thesis links theory to practice by covering the previously untouched topics of takeover risk of companies with different amounts of their value attributable to real options, development of real options for the acquiring company around the acquisition and the difference in post-acquisition performance between acquirers of real options intensive targets versus assets-in-place targets. By studying these effects, the questions whether companies indeed attempt to capture value in targets’ real options and importantly, are they capable in doing so, can be answered. Data and methodology The dataset of this thesis extends from January 1980 to December 2015 and includes NYSE, AMEX and NASDAQ indexes. Stock data is gathered from CRSP and linked to fundamental data from Compustat. The measurement of real options intensity is conducted by measuring the correlation between contemporaneous volatility and stock returns for each sample company based on Grullon, Lyanders & Zhdanov (2012). The companies with the strongest correlation have the largest share of their value in real options. To measure takeover risk, companies are divided into deciles based on their real options intensity. The takeover risk between these deciles is studied via logit regression model. The development of real options for the acquirers is conducted by studying the aggregate time series of the return-volatility correlation coefficient around the acquisition. Last, post-acquisition returns are studied by dividing acquiring companies into two portfolios: acquirers of real options intensive companies versus acquirers of assets-in-place companies. Cumulative abnormal returns are studied based on commonly accepted calendar-time benchmark portfolio approach to study long-term M&A returns. Key findings The findings of this thesis support the hypothesis that on average, companies with a larger share of their value attributable to real options are more likely to be targets of acquisitions compared to companies where value is attributable to assets-in-place. An acquiring company benefits from acquisitions in flexibility, but acquisitions are driven partly by industry-wide factors. The findings of this thesis do no support the hypothesis that acquiring real options intensive companies would result in superior returns compared to acquiring assets-in-place targets or restraining from acquisition altogether. en
dc.format.extent 62
dc.language.iso en en
dc.title Real options’ role in M&A: from theory to practice en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Business en
dc.contributor.department Rahoituksen laitos fi
dc.subject.keyword real options en
dc.subject.keyword mergers & acquisitions en
dc.subject.keyword return-volatility relation en
dc.subject.keyword takeover risk en
dc.subject.keyword M&A returns en
dc.identifier.urn URN:NBN:fi:aalto-201702142380
dc.type.ontasot Master's thesis en
dc.type.ontasot Maisterin opinnäyte fi
dc.programme Finance en
dc.subject.helecon rahoitus fi
dc.subject.helecon yrityskaupat fi
dc.subject.helecon tuotto fi
dc.subject.helecon optiot fi
dc.ethesisid 14837
dc.location P1 I fi

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