thatmaybecreatedwhenthetargetstockpriceincreasesonce
an acquisition is announced.
6 Paul D.Childs,StevenH.Ott, and AlexanderJ.Triantis,
“CapitalBudgetingforInterrelatedProjects:ARealOptions
Approach,” Journal of Financialand Quantitative Analysis
33, no. 3 (1998): 305–334.
7 KennethW.SmithandAlexanderJ.Triantis,“TheValueof
Optionsin StrategicAcquisitions,”inReal OptionsCapital
Investment:Models,Strategies andApplications, ed.Lenos
Trigeorgis (Westport, CT: Praeger, 1995).
8 The real options argument is heavily dependent on two
concepts:thelearningthatoccursbybeinginanewmarket
and the more informed decisions that flow from the learning.
9 Ifthetwofirmsthatarebeingcombinedhavedifferentcosts
of capital and/or different growth rates, therelative value
weightsofthetwofirmswillchangeovertime.Withgrowth,
itiseasytoseewhythishappens.Thefirmwhoseearnings
aregrowingfasterwillseeitsvalueincreasefasterovertime
andbecomealargerpartofthecombinedfirm.Withdifferent
costsofcapital,thereasonisalittlemoresubtle.Thefirm
withthehighercostofcapitalcanbeexpectedtoappreciate
fasterin valueover time and become a larger partof the
combined firm.
10 The unlevered beta of the combined firm will be a
weightedaverageofthebetasoftheindividualfirms,withthe
weights being market value weights. These weights
themselveswillchangeovertimeasthefirmshavedifferent
costsofcapital.Forthevaluestoexactlymatchup,wehave