THE TENDER OFFER PRICE DECISION IN TELECOMMUNICATION AUCTIONS: A REAL OPTIONS ANALYSIS

Authors

  • Davis Machado da Silva Teixeira Pontificia Universidade Catolica do Rio de Janeiro
  • Luiz Eduardo Teixeira Brandao Pontificia Universidade Catolica do Rio de Janeiro
  • Leonardo Lima Gomes Pontifícia Universidade Católica do Rio de Janeiro

Keywords:

Decision to tender a bid offer in a public auction, Real options, Investment analysis, Telecommunications, WiMAX.

Abstract

The decision to tender a bid offer in a public auction depends on many factors. Among them is the expected net present value of the project, which is usually determined using the Discounted Cash Flow method (DCF). However, traditional techniques for valuating investments may not be suitable for valuating projects that involve different options. The aim of this article is to analyze the  maximum value that a firm can offer in an auction of WiMAX frequencies in Brazil, under both the DCF traditional approach and the Real Options approach. This type of project presents many uncertainties and significant managerial flexibilities, which indicates that traditional static valuation methods may not be the more appropriate to determine its value. Our results show that the options embedded in the project increase its value by up to 58% compared to the DCF value. Therefore, the firm can offer a significantly higher bid, increasing its chances of success in the auction, without compromising the economic feasibility of the project. The contribution of this article is to demonstrate that for projects that can be implemented under different operational strategies the value of the bid in public auctions may be undervalued, since the value aggregated by the managerial flexibility present in this class of projects is not captured by traditional investment valuation methods like DCF.

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Author Biographies

Davis Machado da Silva Teixeira, Pontificia Universidade Catolica do Rio de Janeiro

Mestre em Administração pelo Programa de Pós-Graduação em Administração de Empresas da Pontifícia Universidade Católica do Rio de Janeiro (PUC-RJ).

Pesquisador colaborador do Centro de Ciências Sociais da Pontifícia Universidade Católica do Rio de Janeiro.

Luiz Eduardo Teixeira Brandao, Pontificia Universidade Catolica do Rio de Janeiro

Doutor em Engenharia de Produção pelo Programa de Pós-Graduação em Engenharia de Produção da Pontifícia Universidade Católica do Rio de Janeiro (PUC-RJ).

Professor do Centro de Ciências Sociais da Pontifícia Universidade Católica do Rio de Janeiro.

Leonardo Lima Gomes, Pontifícia Universidade Católica do Rio de Janeiro

Doutor em Engenharia de Produção pelo Programa de Pós-Graduação em Engenharia de Produção da Pontifícia Universidade Católica do Rio de Janeiro (PUC-RJ).

Professor do Centro de Ciências Sociais da Pontifícia Universidade Católica do Rio de Janeiro.

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Published

2010-09-17

Issue

Vol. 11 No. 6 (2010): Thematic Special Edition on Decision Making in Organizations

Section

Decision-Making in Organizations

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