Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.003.0004
- Subject:
- Business and Management, Knowledge Management
This chapter develops a framework for assessing the value generated by both the option-like and competitive characteristics of an acquisition strategy. The conceptual approach is based on real ...
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This chapter develops a framework for assessing the value generated by both the option-like and competitive characteristics of an acquisition strategy. The conceptual approach is based on real options and principles from game theory. It illustrates the approach with an example of how real options and games thinking were used in strategic decision making at a major pharmaceutical company. The method treats an acquisition strategy as a package of corporate real options actively managed by the firm in a context of competitive responses or changing market conditions. This framework can help management answer several questions that are important for a successful acquisition strategy: How valuable are the growth opportunities created by the acquisition? How can we best sequence the acquisition options in the strategy? When is it appropriate to grow organically, and when are strategic acquisitions the preferred route? How is the industry likely to respond, and how will that affect the value of our acquisitions and future targets? The subsequent sections present a series of frameworks to address these questions.Less
This chapter develops a framework for assessing the value generated by both the option-like and competitive characteristics of an acquisition strategy. The conceptual approach is based on real options and principles from game theory. It illustrates the approach with an example of how real options and games thinking were used in strategic decision making at a major pharmaceutical company. The method treats an acquisition strategy as a package of corporate real options actively managed by the firm in a context of competitive responses or changing market conditions. This framework can help management answer several questions that are important for a successful acquisition strategy: How valuable are the growth opportunities created by the acquisition? How can we best sequence the acquisition options in the strategy? When is it appropriate to grow organically, and when are strategic acquisitions the preferred route? How is the industry likely to respond, and how will that affect the value of our acquisitions and future targets? The subsequent sections present a series of frameworks to address these questions.
Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.003.0003
- Subject:
- Business and Management, Knowledge Management
In a period of only a few years in the early 2000s, Vodafone's then CEO Chris Gent grew the company from a small UK-based mobile operator into the world leader, with over 240 million customers. He ...
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In a period of only a few years in the early 2000s, Vodafone's then CEO Chris Gent grew the company from a small UK-based mobile operator into the world leader, with over 240 million customers. He did this via a sequence of 26 strategic transactions, including the acquisition of AirTouch and deals leading to the creation of the Verizon wireless business in the United States. Judging from Vodafone's acquisition story, Gent played his cards well, while both Vodafone's rivals and the financial markets acted irrationally in some instances. However, even Gent may have made some typical serial acquisition errors on the road to building the world's leading telecom company. This chapter uses the Vodafone story to illustrate how behavioral pitfalls in strategy, valuation, and bidding can be related to various components of the options and game valuation approach.Less
In a period of only a few years in the early 2000s, Vodafone's then CEO Chris Gent grew the company from a small UK-based mobile operator into the world leader, with over 240 million customers. He did this via a sequence of 26 strategic transactions, including the acquisition of AirTouch and deals leading to the creation of the Verizon wireless business in the United States. Judging from Vodafone's acquisition story, Gent played his cards well, while both Vodafone's rivals and the financial markets acted irrationally in some instances. However, even Gent may have made some typical serial acquisition errors on the road to building the world's leading telecom company. This chapter uses the Vodafone story to illustrate how behavioral pitfalls in strategy, valuation, and bidding can be related to various components of the options and game valuation approach.
Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.003.0005
- Subject:
- Business and Management, Knowledge Management
This chapter discusses the application of the top-down and bottom-up duality of the real option frameworks to valuing serial acquisitions. It develops the market-based present value of growth options ...
More
This chapter discusses the application of the top-down and bottom-up duality of the real option frameworks to valuing serial acquisitions. It develops the market-based present value of growth options (PVGO) method into a framework that directly connects serial acquisition strategy to value creation on financial markets, and so helps to explain the full market value of companies in consolidating industries. In addition, in a bottom-up approach, it considers acquisitions as portfolios of interrelating acquisition options, each stage being an option on the next, which can develop the firm's asset base dynamically and opportunistically. This dual approach to value acquisition programs is called the market method for acquisitions.Less
This chapter discusses the application of the top-down and bottom-up duality of the real option frameworks to valuing serial acquisitions. It develops the market-based present value of growth options (PVGO) method into a framework that directly connects serial acquisition strategy to value creation on financial markets, and so helps to explain the full market value of companies in consolidating industries. In addition, in a bottom-up approach, it considers acquisitions as portfolios of interrelating acquisition options, each stage being an option on the next, which can develop the firm's asset base dynamically and opportunistically. This dual approach to value acquisition programs is called the market method for acquisitions.
Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.003.0006
- Subject:
- Business and Management, Knowledge Management
Valuing uncertainty in strategy requires the development of quantitative models reflecting the conceptual options games view on strategy. The application of fresh ideas based on two major strands in ...
More
Valuing uncertainty in strategy requires the development of quantitative models reflecting the conceptual options games view on strategy. The application of fresh ideas based on two major strands in the existing literature—real options and game theory—has attracted increased interest, both to academia and to acquisition strategy practitioners. Despite the mathematical elegance of option game models, the key metrics and tools for implementation have not yet been fully developed, especially with regard to providing relevant managerial guidance. This chapter presents an in-depth examination of Xstrata's Falconbridge acquisition through option and game lenses in order to provide insights into the implementation of these new and effective quantitative real option models in practice, as well as pointing out their limitations.Less
Valuing uncertainty in strategy requires the development of quantitative models reflecting the conceptual options games view on strategy. The application of fresh ideas based on two major strands in the existing literature—real options and game theory—has attracted increased interest, both to academia and to acquisition strategy practitioners. Despite the mathematical elegance of option game models, the key metrics and tools for implementation have not yet been fully developed, especially with regard to providing relevant managerial guidance. This chapter presents an in-depth examination of Xstrata's Falconbridge acquisition through option and game lenses in order to provide insights into the implementation of these new and effective quantitative real option models in practice, as well as pointing out their limitations.
Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.003.0007
- Subject:
- Business and Management, Knowledge Management
This chapter reviews the strategic framework that integrates options and competitive games to de-bias decision making, and recaps the main conclusions and strategy implications. It provides empirical ...
More
This chapter reviews the strategic framework that integrates options and competitive games to de-bias decision making, and recaps the main conclusions and strategy implications. It provides empirical evidence that acquisitions are driven by growth options and behavioral economics, discusses examples of option game applications beyond acquisitions, and lists promising directions for future research. Most important, it provides a decision framework for directly integrating finance and acquisition strategy in uncertain environments. The authors hope that this book helps readers apply an options perspective to significant nonfinancial decisions, including such vital life decisions such as the design of one's education strategy or career plan, or more common problems such how to plan holiday journeys. They believe valuable lessons can be learned as the reader applies the insights in this book to a broader set of uncertainty problems, although they are impossible to quantify.Less
This chapter reviews the strategic framework that integrates options and competitive games to de-bias decision making, and recaps the main conclusions and strategy implications. It provides empirical evidence that acquisitions are driven by growth options and behavioral economics, discusses examples of option game applications beyond acquisitions, and lists promising directions for future research. Most important, it provides a decision framework for directly integrating finance and acquisition strategy in uncertain environments. The authors hope that this book helps readers apply an options perspective to significant nonfinancial decisions, including such vital life decisions such as the design of one's education strategy or career plan, or more common problems such how to plan holiday journeys. They believe valuable lessons can be learned as the reader applies the insights in this book to a broader set of uncertainty problems, although they are impossible to quantify.
Han Smit and Thras Moraitis
- Published in print:
- 2015
- Published Online:
- October 2017
- ISBN:
- 9780691140001
- eISBN:
- 9781400852178
- Item type:
- book
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691140001.001.0001
- Subject:
- Business and Management, Knowledge Management
It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new ...
More
It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new competitors, are further complicating the task of valuing acquisitions. Too often, managers rely on flawed valuation models or their intuition and experience when making risky investment decisions, exposing their companies to potentially costly pitfalls. This book provides managers with a powerful methodology for designing and executing successful acquisition strategies. The book tackles the myriad executive biases that infect decision making at every stage of the acquisition process, and the inadequacy of current valuation approaches to help mitigate these biases and more realistically represent value in uncertain environments. Bringing together the latest advances in behavioral finance, real option valuation, and game theory, this book explains how to express acquisition strategies as sets of real options, explicitly introducing uncertainty and future optionality into acquisition strategy design. It shows how to incorporate the competitive dynamics that exist in different acquisition contexts, acknowledge and even embrace uncertainty, identify the value of the real options embedded in targets, and more. Rooted in economic theory and featuring numerous real-world case studies, the book will enhance the ability of CEOs and their teams to derive value from their acquisition strategies, and is also an ideal resource for researchers and MBAs.Less
It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new competitors, are further complicating the task of valuing acquisitions. Too often, managers rely on flawed valuation models or their intuition and experience when making risky investment decisions, exposing their companies to potentially costly pitfalls. This book provides managers with a powerful methodology for designing and executing successful acquisition strategies. The book tackles the myriad executive biases that infect decision making at every stage of the acquisition process, and the inadequacy of current valuation approaches to help mitigate these biases and more realistically represent value in uncertain environments. Bringing together the latest advances in behavioral finance, real option valuation, and game theory, this book explains how to express acquisition strategies as sets of real options, explicitly introducing uncertainty and future optionality into acquisition strategy design. It shows how to incorporate the competitive dynamics that exist in different acquisition contexts, acknowledge and even embrace uncertainty, identify the value of the real options embedded in targets, and more. Rooted in economic theory and featuring numerous real-world case studies, the book will enhance the ability of CEOs and their teams to derive value from their acquisition strategies, and is also an ideal resource for researchers and MBAs.
