Rational Pricing of Internet Companies Operating in Emerging Market

Lau, Yue Ming Alan (2008) Rational Pricing of Internet Companies Operating in Emerging Market. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

Tradition discounting cash flows (DCF) technique no doubt is a handy and useful tool for managers to valuate projects on hand or values of companies. Yet, due to its inborn insufficiencies and not practical assumptions, the usefulness of conventional DCF approach would seem limited when capturing the value of managerial flexibilities. In the current dynamic business world, uncertainties constitute a large part of companies���¢�������� value, especially of those in internet industry. Hence, the value would be hugely underestimated under the DCF valuation and would suggest wrong decisions to managers and calculate incorrect values of companies.

To remedy this problem, real options approach is suggested to be the medicine. Building on Myers���¢�������� idea (1977) of treating discretionary investment opportunities as ���¢��������growth options���¢��������, researchers gradually developed the framework for real options. It is believed that the real options approach can capture the managerial flexibility and strategic importance of projects, which the DCF technique cannot capture. Through real options, the true implicit value of a project or an company can be obtained. Among researchers in real options aspect, Moon and Schwartz developed a model especially fitted in the context of internet companies. They further demonstrate their model through the example of Ebay and Amazon.

In this paper, the Moon and Schwartz model (2000, 2001) is adopted but applied to a Chinese firm, Baidu. As a web-search engine giant operating in China, Baidu is a NASDAQ-listed company and believed to have a bright future. As discussed before, the DCF approach will be unable to calculate the correct value of Baidu whose value is comprised mostly by the future potential of its services. Further, it is rare that research target is operating in emerging market. Therefore, this paper aims to use the Moon and Schwartz model to find out the underlying value for Baidu and tries to find out the true value driver behind its value.

The result from the model reveals that Baidu���¢��������s current stock price is highly overvalued and the key drivers are its revenue and variable cost level. It is hoped that through this paper Chinese managers can get more familiar with real options approach and use it to offer themselves better valuation tools.

Item Type: Dissertation (University of Nottingham only)
Keywords: Real options, Valuation
Depositing User: EP, Services
Date Deposited: 07 Jan 2009
Last Modified: 23 Oct 2016 16:22
URI: http://eprints.nottingham.ac.uk/id/eprint/21926

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