Title: Applying real options analysis to value the GM-Fiat strategic joint venture

Authors: Octavian Ionici, Kenneth Small, Steve Kramer

Addresses: Department of Finance, Kogod School of Business, American University, Washington, DC 20016, USA. ' Department of Accounting, Finance & Economics, Wall College of Business Administration, Coastal Carolina University, Conway, SC 29528, USA. ' Department of ISOM, Sellinger School of Business and Management, Loyola College in Maryland, Baltimore, MD 21210, USA

Abstract: GM and Fiat entered a strategic joint venture (JV) in 2000 that lasted only five years, but set the stage for the resulting meteoric rise of Fiat, who in 2009 acquired Chrysler to become the second largest automobile producer in Europe. We apply real options analysis to value the strategic alliance between GM and Fiat and show how options, in this case a put option, can be used as currency when strong bargaining power exists. We also highlight some of the problems related to the inherent flexibility embedded in the GM-Fiat agreement. As a result, we suggest the need to create a customised model which mitigates the conflict between the conclusion of strategic analysis and the real option approach. Insights from options-based analyses should improve not only the estimates of asset value, but also the decision-making process. Like an engaged couple that never make it to the altar, correctly pricing the strategic options embedded in a JV contract will save money, time and missed opportunities.

Keywords: real options analysis; strategic alliances; joint ventures; automotive JVs; acquisitions; General Motors; Fiat; automobile industry.

DOI: 10.1504/IJADS.2009.031179

International Journal of Applied Decision Sciences, 2009 Vol.2 No.4, pp.341 - 359

Published online: 24 Jan 2010 *

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