International merger evaluation model with stochastic real exchange rate

Abstract

This study presents an international merger valuation model using stochastic real exchange rate which follows the geometric Brownian motion or the square root of the mean reverting process as a decision variable for assessing whether only one domestic firm should merge with one foreign firm to remain strategic alliances for unique product produced and sale with a monopolistic foreign market. The proposed model applies the real options approach to calculate the before and after project values of international merger undertaking and analyze the threshold of this merger which are dealt with real exchange rate. Assuming that firm profit function is given, the threshold of the real exchange rate is assessed and numerical examples are also presented for sensitivity analysis. The mathematical and numerical analysis results can provide decision makers with a reference for deciding whether to maintain existing strategic alliances or pursue international mergers.

Keywords and phrases:

• Decision making
• international merger
• real exchange rate
• real options
• geometric Brownian motion
• mean reverting process