separately and allows for the option component of value
explicitly.
Thebiggest limitationof the option-basedapproach is the
informationthatisneededtoputitinpractice.Tovalueeach
patentseparately,weneedaccesstoproprietaryinformation
thatisusuallyavailableonlytomanagersofthefirm.Infact,
someoftheinformation,suchastheexpectedvariancetouse
inoptionpricing,maynotevenbeavailabletoinsidersand
will have to be estimated for each patent separately.
Given theselimitations, thereal-optionapproachshouldbe
usedtovaluesmallfirmswithoneortwopatentsandlittlein
termsofestablishedassets.AgoodexamplewouldbeBiogen
in1997,whichwasvaluedintheprecedingsection.Forfirms
suchasCiscoandPfizerthathavesignificantassetsinplace
andhundredsofpatents,discountedcashflowvaluationisa
morepragmaticchoice.Viewingnewtechnologyasoptions,
though, provides insight into Cisco’s successful growth
strategyover thepast decade.Cisco hasbeensuccessful at
buying firms with nascent and promising technologies
(options) and converting them into commercial success
(exercising these options).
Natural Resource Options
Natural resource companies, such as oil and mining
companies,generatecashflowsfrom theirexistingreserves
butalsohaveundevelopedreservesthattheycandevelopif
they choose to do so. They will be much more likely to
developthesereservesifthepriceoftheresource(oil,gold,
copper) increases, and these undeveloped reserves can be
viewedascalloptions.Inthissection,webeginbylookingat