The objective of this thesis is to apply some valuation techniques to estimate the value of a target start-up company in Merger and Acquisition deal. After the stock market crash of 2000 in Korea, restructuring of these start-up companies took place. With the globalization of financial markets and continuous self-restructuring efforts among start-up companies, M&A deals are expected to increase rapidly.
This study starts with an overview of M&A, and then illustrates traditional valuation techniques such as Discounted Cash Flow(DCF) model and price multiple models. In particular, this study emphasizes on real option model that is based on financial option pricing theory. For these models, the study uses an actual case, eBay`s stock acquisition of Internet Auction Co., LTD.
DCF value was calculated based on traditional free cash flow model. For price multiples, Price Sales Ratio and Market-to-Book ratio were used. And real option value was calculated using Luerhrman`s framework with Black-Sholes formula. The results showed that real option model was more appropriate in explaining the acquisition price of Internet Auction Co., LTD. because DCF did not fully consider the value of uncertainty and flexibility.
In sum, it is difficult to conclude that a technique is always superior to others. It is important to identify a situation in which a particular technique is more appropriate. This study attempted to provide some explanation for such situations.
