The Valuation of Mergers and Acquisitions in the Stock Market Based on the Real Options Approach

The purpose of this study is to develop a valuation framework for mergers and acquisitions by explicitly incorporating the synergy effect of mergers. Based on the real options approach, we introduce the upper and lower bounds of terms for an acquirer that makes a merger profitable to both the acquirer and the target. We show the existence of an optimal timing and terms, depending on the profit flows at the time of the merger. In addition, we analytically and numerically explore when mergers are likely to take place