Chapter 7 Valuation of Technology - Based Companies : The Case of Activision Blizzard

The cash flows of technology-based companies show high degrees of uncertainty. As traditional valuation methods can hardly capture these characteristics, they are insufficient for valuing these kinds of companies. On the contrary, real options theory can quantify the value associated with management flexibility, growth opportunities, and synergies. This chapter assesses the corporate value of a technology-based company. By gathering information from historical cash flows and using Monte Carlo simulations, the chapter generates future returns paths and primarily uses them for valuations by discounted cash flow methods. The generated volatility is subsequently used to value the measurement carried out by real options theory. The value obtained under the real options binomial approach is about 40% higher than the one obtained by the discounted cash flow method. This difference can be attributed to the value associated with uncertainty and flexibility.