Abstract
Academic research often concludes that mergers, acquisitions, or divestments have mixed records in creating firm value. In this chapter, we take a real option logic and intuitively examine how a transaction could be seen as (a) achieving premium by gaining scale and portfolio optimisation (i.e. BG–RDS merger); (b) creating options through serial acquisitions or divestments (i.e. Serica Energy); or (c) surviving obsolescing bargain and recycling cash after Argentina’s sequestration of YPF from Repsol. In a number of these cases, individual transactions may appear to be value eroding. However, when divestments are viewed as reversals of prior commitments, followed by reinvesting the cash, the series of transactions is in reality a process of creating (i.e. selling to raise cash) or exercising (i.e. acquiring) the real options that are embedded in each asset. These real options are valued within the context of the firm’s portfolio.
Bala Nagarajan, Investment Director, Statoil, London, United Kingdom, contributed to this chapter, with comments from Ian Chisholm, former Vice-President, financial markets, Royal Dutch Shell, and Vice-President, corporate finance, BHP Billiton.
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Barcelona, R.G. (2017). Acquire or Build. In: Energy Investments. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-59139-5_13
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DOI: https://doi.org/10.1057/978-1-137-59139-5_13
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