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College aantekeningen Advanced Corporate Finance & Strategy (FEB11006) Strategic Investment, ISBN: 9780691010397
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Week 1Introduction: Improving your decision making
When valuing potential investments, you should not only look at their value today, but also at the future
growth opportunities. Only when you value strategies instead of standalone projects, you get the complete
picture of a potential investment's value.
Intertemporal synergies you do something now that changes your strategic situation in the future.
E.g. this master will decide your future job; your first job, second and third etc..
Valuable New Field
Static valuation methods need to be extended when:
1. When intertemporal syneries (path dependencies) are important.
First investment -> leads to the next opportunity -> and the next opportunity
Early investments are prerecorded sets for the ones that follows
(Real options: to value intertemporal synergies (a first investment leads to new opportunities), flexibility of
venture capital investments, high-tech growth firms, etc. )
2. To determine the price in bidding situations
(Price is what you pay, Value is what you get)
If you pay a price of the value, you give everything (extra) to the shareholders.
Value of synergetic opportunities makes sure that the price you pay is lower than buyer value
Stand-alone price +Value of synergetic opportunities= Buyer value
Stand-alone price + acquisition premium = Price
(Games: pricing in bidding situation )
Use game theory to analyze this situation
Explanations when rival’s bid is exceedingly high
i. Rational Explanations: The value of future opportunities (real options) justifies the bid
ii. Irrational Explanations: Price exceeds expected value
,→ Confirmation Bias: you didn’t look enough to information that rejects the
things you want to do.
→ Over commitment(and you forget about sunkcosts)
Commitment game
Competition v.s. Collusion Dependent on the structure of auction —> reduce competition or increase
collusion
Confirmation bias common fault, because we only look at the data that confirms it and not that declines it
Overconfidence -> effects decision
In which situations do we need to go beyond DCF valuation?
1. Platform acquisitions: A platform acquisition may strengthen a company’s core capabilities or provide access
to new geographical locations, creating a path for future growth opportunities. The value of a platform
acquisition is therefore not only the standalone value of the platform, but also the many opportunities it
provides access to.
5. Follow-on Acquisitions: The future acquisition opportunities are simple options and can be taken in the
future if conditions turn out to be favorable. These acquisitions offer benefits primarily through synergies or an
expected stream of earnings (or operating cash-flows) to the company.
Case Application
Case I. Valuation of Platforms and Buy-and-Build Strategies
A long-term sequential strategy in which resources and competences of a platform firm are leveraged onto
follow-on acquisitions over a wider geographic, product or customer base.
Case 2. Bubbles show the Need for Fundamental Valuation of High Growth Firms
Case 3. Restructuring Strategies of Inefficient or Undervalued Diversified Firms
Summary
,Objectives of the Course Make better decisions under uncertainty and competition in corporate strategy
and finance
DCF approach is a powerful methodology for valuation Sometimes we need to go beyond DCF:
Real options: to value intertemporal synergies/ flexibility of venture capital investments, high-tech growth
firms; buy-and-build strategies and restructuring strategies.
Games pricing in bidding situation
Video’s
1. Improving your decision making
It is essential to start making better decisions now. Decision today has a significant impact on your future. We
will revolutionize your way of decision-making, by extending static techniques from corporate finance with
dynamic methods to quantify strategic thinking. Therefore, future decisions are highly influenced by
uncertainty and competition. So, when you decide based only on the current situation, you might miss out on
uncertain but promising opportunities. But if you are open to embrace uncertainty, explore opportunities and
seize them, you can change your path and increase value. To help you with this, we introduce a new and
important foundation of valuation. from focusing on static DCF valuation to the valuation of complete
strategies. When valuing potential investments you should not only look at their value today, but also assess
which future growth opportunities they create. what you decide now has an influence on the future.
expanded NPV = which brings together DCF + options and games.
2. Where the value comes from!
Illusion shows that it can be quite difficult to estimate things properly. Especially when valuing potential
investments it is important to make correct estimations. To avoid misevaluation expanded strategic
present value.
Company value is often based on traditional valuation methods of corporate finance, such as the DCF analysis
determine the present value of a company's existing assets, it explains merely a part of a company's total
value. Besides knowing a company's value of assets currently in place, it is crucial to recognize the Present
Value of Growth Opportunities. The PVGO omnipresent and often substantial component of a company's
market value, especially in innovative firms in a continuously changing environment. The PVGO reflects a
company's future options on real assets.
Strategic value we must consider that all future opportunities are vulnerable to rivals actions. Therefore, we
combine the DCF and real options approach with game theory.
When you combine these three components of value, it all comes together in the expanded strategic present
value. Expanded strategic present value =NPV + PVGO
, Market value firm Value drivers Valuation methods
Investment decisions are not seen as a now-or-never proposition, but as an option to develop real assets. A
real option refers to choices on whether and how to proceed with a business investment. Real options help
you to take advantage of the uncertainty of the future: by investing in a real option now, you create uncertain,
long-term opportunities that you can, but don’t have to harvest later. Uncertainty makes real options flexibility
valuable! So from a real options perspective, you see an uncertain future as a set of opportunities. And when
you invest in options, you are flexible, which is very valuable in the face of an uncertain future.
This is the essence of real options, which you can apply everywhere; both in your personal life and in
business. With growth options, you open future opportunities, forming a link in
a chain of interrelated projects. With the option to expand or contract,
you're flexible to upscale or downscale projects.
And with the option to abandon, you can dispose of unprofitable projects completely and recover some resale
value. Sometimes, it is desirable to pause projects, which you can do with the option to temporarily shut
down. This allows you to start up again, under favorable circumstances. And with staged financing, investment
risks can be reduced by financing high-risk projects in stages, rather than all at once. This allows you to stop
when the projects' performances don't meet their expectations.
Real options allow you to adapt to uncertainty. To help you recognize and weigh your options, we will show
you how to analyze and value them. This way, you'll become able to design and adjust your strategy when
investing. Not only in business, but also in life.
Options give you the ability to influence your future. While options can be exclusive, more often you must
share them with competitors. To predict how others might affect your shared options, we use game theory,
which is the study of competitive interaction. Rivals are the other players in a game. A game in which all
players interact with each other according to rules. When you play the game well,
you can anticipate other players' moves and design your optimal strategy.
Game theory is not new, but we take it to the next level in valuation, by combining games with real options
into option games. With the expanded strategic present value, you'll recognize: "Price is what you pay, value is
what you get."
Because their decisions influence one another, they will need to keep each other in mind during all their
investment decisions. This is essential when participating in option games.
How could you have valued this as an option game? Combining real options with games works as follows: First,
you must consider what your options can be worth in the future, then anticipate what rivals will do, and
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