Market dominance options and asset structure: the case of Microsoft and Cisco

This paper introduces a class of real options, market dominance options (MDOs), to describe corporate strategic investments in the securities of other firms and M&A processes. An implied corporate project risk measure is extracted from the asset structure and used in real option valuation. The MDO methodology is applied to the study of the feasibility of recent major strategic investments of Microsoft and Cisco. The projected added sales figures implicit in the pricing of these transactions under various competitive scenarios are derived and compared with the actual revenue results.