Valuation of Corporate Growth Opportunities

A Real Options Approach

Richard E. Ottoo

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138994010
• eBook ISBN: 9781136542473
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

How can we value an enterprise, like a young internet start-up company, that has no earnings or cash flows, so that traditional and conventional valuation techniques are therefore not applicable? One of the most notable recent industrial revolutions has been the emergence of Biotechnology and Internet companies. Most of these technology companies are predominantly young with no history of earnings or cash flows to evaluate. This book addresses the problem, and presents a model for valuing enterprises that may have no existing assets but only growth opportunities.

Chapter 1

Growth Opportunities: An Overview

“My great fear is that there are three guys in a garage right now doing the same thing to us that we did to Reuters and Dow Jones.”

–Michael R. Bloomberg, Bloomberg Financial Markets, Inc.¹

1.1 Introduction

Call it “creative destruction.” The epitome of the new global economy is the entrepreneurial passion for change. From nations emerging out of centralized planning to the epicenter of global technology - the Silicon Valley, there is an exciting new crop of entrepreneurs who are unleashing a flood of successful new products as well as business models.² Companies are being created in record number and at great speed.³ The old brick-and-mortar corporations are experiencing a shakeout as many are being forced to renew strategies or cannibalize their core business models in order to survive the technological onslaught.

In a recent report, Fortune magazine observed that “never before have we seen so many companies explode from birth to market capitalization in the tens of billions of dollars so fast.”⁴ What is mind-boggling is that these young firms can no longer be judged by the same traditional rules that have been used to evaluate enterprises. The reason is that the basics are lacking. Some of these companies have no factories or profits to report. But they offer one thing nevertheless: growth opportunities.

The surge in the number of startup firms coupled with a run up in the prices of their stocks has recently heightened general interest in corporate valuation issues. Most economists in the last five decades upheld the Schumpeterian hypothesis which argues that innovation and technological change are much more likely to come from big business, finding support in the theory of inappropriability and the proven technological breakthroughs by companies like AT&T, Corning and General Electric in transistors, fiber optics and medical imaging. However, there is now a flurry of start-ups and emerging firms that are fueling the emergence of advanced technologies.

In some cases, they have instituted entirely new industries. Twenty years ago, the biotechnology industry hardly existed. Now, it is a multibillion dollar business and firmly established. Then again, witness the emergence of the newest industry, the community of e-corporations, companies built around the Internet which many people now believe is changing the world.

Corporate research and development (R&D) laboratories are now being driven to think more in terms of profit and losses. Companies are gripped by a new wave of dual demand, to introduce quality products and services that consumers can pay for and speed up their delivery to the market. Quality is now d...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright Page
• Dedication
• Preface
• Acknowledgments
• Table of Contents
• List of Tables
• List of Figures
• Half Title
• 1. Growth Opportunities: An Overview
• 2. The Valuation Model
• 3. Comparative Static Analysis
• 4. Scenario Analysis: A Case Study of a Biotechnology Company
• 5. Financing A Growth Project: A Binomial Approach
• 6. Empirical Analysis
• 7. Summary, Problems and Future Research
• Appendix I
• Appendix II
• Appendix III
• Bibliography
• Index