Real Options in M&A

Marc Wynn Viuff & Andreas Erik Hadsbjerg

Student thesis: Master thesis


The scope of this thesis has been to investigate whether a real option approach could complement the traditional DCF-analysis in M&A. This is done by bridging the theoretical framework to the real-life case of French oil company Total S.A.’s acquisition of Danish oil company Maersk Oil in 2018 for USD 7,45 bn. The limitation of the DCF-model is the static approach to investment decisions. This makes it suitable for bluechip investments with steady cash flows but lacks precision when applied on larger investment decisions with elements of uncertainty. In addition, it does not account for the managerial flexibility of adapting to changing market conditions, which may lead to an underestimation of the value of the investment. In an attempt to manage this shortcoming, it is imposed to incorporate the advantages from the financial option theory, a real option model approach is applied in order to take the value of the flexibility into account. In the valuation, the traditional DCF-model has been applied to value the underlying asset and the Monte Carlo approach applied to obtain an estimate of the volatility of the underlying asset. These inputs were used in a binomial inspired model in order to obtain accurate estimates of the value of the merger. This thesis assesses that the static value of Maersk Oil using the DCF-model was USD 4,697 bn. which suggests that the merger should not have been carried out, due to the initial investment required of USD 7,45 bn. By applying the real option approach, the value of Maersk Oil including the value of flexibility for Total is USD 9,558 bn. This suggests that Total paid an acquisition premium of USD 2,753 bn. and receives potential synergies of USD 2,108 bn. In conclusion it is deemed that the real option approach can be a valid addition to the DCF-analysis to some extent in M&A. It provides a precise estimate of the value and accounts for the strategic value of the investment which may help bridge the gap between finance and strategy. On the contrary, the model is very time consuming which may require an investment of some scale to justify the preparation and sets several requirements to the financial knowledge of the analyst to distinguish between the various variations and assumptions of the model.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages137
SupervisorsSøren Plesner