Chapter 17: Finance and Corporate Strategy Objective Understanding: Mergers & Acquisitions Spinoffs Real Options Copyright © Prentice Hall Inc 2000 Author: Nick Bagley, bdellaSoft, Inc Chapter 17 Contents • 17.1 Mergers and Acquisitions • 17.2 Spinoffs • 17.3 Investing in Real Options Derwyn Productions: Decision Tree (yes, no) (Probability = 0.5) Make the movie? (NPV $4 Million) Book a Success? (Probability = 0.5) Make the Movie? (NPV -$4 Million) Buy the movie rights to book? (Cost $1 Million) Raider’s Takeover of Target Using Options: Computation • Observe that the Targets Future is equal to the option’s strike, so the simplified BS equation may be used T C ≈ Sσ = $100,000,000 * 0.20 * = $7.98 million 2π 2π • The NPV of the investment is therefore $(86) millions = $2 millions (do it) – The premium distributed to the shareholders