“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate marke

ASP -pricing: A Black -Scholes option pricing formulation

The Applications Service Provider (ASP) arrangement has engendered a revolution in the area of corporate information technology (IT) by transforming software from a packaged off-the-shelf product to an on-line virtual service. The focus of this study is to establish a sound mathematical foundation for evaluating software rental agreements (embedding exit flexibility) by incorporating a real options framework (based upon the Black-Scholes approach) into the traditional capital budgeting technique. The static discounted cash flow or net present value analysis may not adequately serve as a ‘barometer’ of outsourcing value due to its inherent weaknesses. On the other hand, the options approach to valuing real investments appropriately prices the state-contingent opportunity risk of outsourcing flexibility in the model\u27s variance parameter. ASP or outsourcing mechanisms embedding the exit (or, deferral) option are developed and examined from the viewpoint of the renter as well as the subcontractor. From the renter\u27s perspective, the value of the flexible outsourcing contract is modeled as a combination of tangible and intangible payoffs. A numerical illustration is used to demonstrate the applicability of the proposed model. The intangible payoff (given applications software alternatives), which is evaluated within the Margrabe\u27s simple exchange option model, is found to increase at higher volatility levels, with the highest option prices (and investment values) tending to occur where the technological divergence between underlying applications environments is the greatest. Therefore, while evaluating rental software alternatives, IT managers should also consider the underlying applications technology in terms of the directional impact of new information. From the subcontractor\u27s perspective, the value of the flexible outsourcing contract is modeled as a combination of a continuing ASP arrangement and the ‘aggregate’ option premium. A numerical analysis is conducted using actual data to examine model outcomes in the light of some results gleaned from related financial and real options literature. The value of exit flexibility, calculated as a ‘truncated’ nested call within a modified version of Carr\u27s compound exchange option model, is less than the commonly designated upper bound. The analysis also reveals that the intermediate exit options can be expressed in terms of the terminal exit opportunity. Hence, one may obtain the outsourcing value by easily ‘weighing’ the simple option premium for the final decision implementation point with the appropriate ‘probability-discount’ factor. Further, consecutive options in the nested series exhibit a decreasing price trend as is observed under other multi-stage options scenarios. Finally, the study develops a theory of optimal exit times for outsourcing contracts that are designed to continue indefinitely into the future. (Abstract shortened by UMI.

The cost of choice: how corporate real estate managers evaluate business space options

Firms are faced with a wider set of choices when they identify a need for new office space. They can build or purchase accommodation, lease space for long or short periods with or without the inclusion of services, or they can use “instant office” solutions provided by serviced office operators. But how do they evaluate these alternatives and are they able to make rational choices? The research found that the shortening of business horizons lead to the desire for more office space on short-term contracts often with the inclusion of at least some facilities management and business support services. The need for greater flexibility, particularly in financial terms, was highlighted as an important criteria when selecting new office accommodation. The current office portfolios held were perceived not to meet these requirements. However, there was often a lack of good quality data available within occupiers which could be used to help them analyse the range of choices in the market. Additionally, there were other organisational constraints to making decisions about inclusive real estate products. These included fragmentation of decisions-making, internal politics and the lack of assessment of business risk alongside real estate risk. Overall therefore, corporate occupiers themselves act as an interial force to the development of new and innovative real estate products

Locating Decision Rights: Evidence from the Mutual Fund Industry

Mutual fund advisors make portfolio decisions for their funds on a daily basis. We examine the location of these portfolio decision rights on two dimensions. First, we consider the geographic location of the decision rights. Second, we consider whether the decision rights remain with an advisor or are allocated to an independent sub-advisor. We argue that the allocation of portfolio decision rights involves a tradeoff between the opportunity cost of not matching decision rights with specific knowledge, and the agency costs associated with moving the decision rights to the specific knowledge. The patterns in the location of decision rights are consistent with the tradeoff being a meaningful determinant of the allocation of decision rights in the mutual fund industry. We also find that funds that are predicted to be sub-advised and are sub-advised outperform those that are predicted to be sub-advised but are not

Inventory Signals

How does operational competence translate into market value, when firms cannot credibly communicate their competence to the market? I consider the example of inventory and fill rates. When the market sees a high-inventory firm, it cannot tell whether the inventory is due to incompetence or a strategy to enhance fill rate. Firms might decide to signal their competence to the market by carrying less inventory. I show conditions for separating and pooling perfect Bayesian equilibria. I also provide empirical evidence for this theory that inventory has a signaling role. The theory could potentially provide a framework that describes one way in which a range of operational competences such as purchasing and outsourcing, translate to market value. Practically, it has implications for firms, such as how to strategically communicate to the market, reward managers, or even whether to go public and be subject to market pressures.Inventory; signaling; operations management; asymmetric information

Transforming the Enterprise of Acquiring Public Sector Complex Systems

Proceedings Paper (for Acquisition Research Program)The acquisition of public sector complex systems is time consuming, very expensive, and rife with uncertainties. The enterprise associated with acquisition is an excellent candidate for transformation''fundamental change to achieve substantially higher levels of value. This paper argues that choosing among alternative transformation initiatives should be based on an enterprise-wide perspective as well as an economic valuation of the alternative investments. An options-based methodology for assessing economic value is presented and illustrated.Naval Postgraduate School Acquisition Research ProgramApproved for public release; distribution is unlimited

Production of a New Drug: A Sequential Investment ProcessUnder Uncertainty

On the basis of a database of more than 80 thousand records on total retails and production costs of the pharmaceutical industry worldwide we consider four classes of drugs. We evaluate the expected profits of an investment in a new drug in the four classes of pharmaceutical products by considering the standard NPV evaluation. We compare these outcomes with the evaluation of the expected profits of the four new drugs obtained by the real option approach. Interestingly enough quite different outcomes are obtained. These results loom on the capacity of standard methods to give a reliable evaluation of real investment projects that are analogous to compound optionscompound option, real option valuation, net present value, drugs

Understanding value generation in buyouts

In this paper, the authors develop a three-dimensional conceptual framework for value generation in buyouts that categorizes and links the different levers of buyouts value generation. This framework provides the basis to take a look beyond individual value levers and shed light on the underlying strategic logic of buyouts.private equity; buyout; value generation

Technology market intermediaries to facilitate external technology exploitation: The case of IP auctions

Recently the phenomena of external technology exploitation (ETE) has started to attract attention from scholars, businesses and politicians likewise alongside with a growth of the markets for technology. However, the markets for technology are still characterized by inhibiting obstacles that lead to high transaction costs, thus prohibit efficient transactions and result in market failure. Although, on the one hand the presence of obstacles lead to high transaction costs, the large market potential on the other hand provides incentives for technology market intermediaries (TMI) to develop new exploitation models to facilitate ETE transactions by reducing transaction costs. Throughout this paper we address the general research question of whether and how new exploitation models can actually facilitate ETE. To address this question, in a first step we generate insights into TMIs acting on the markets for technology and derived a conceptual basis for a further understanding of TMIs. Having carried out a detailed review of the literature, we develop a theory based typology for six TMI archetypes. Throughout this exercise we gain insights into the variety of different functions TMIs have on the markets for technology and various new ways how TMIs try to facilitate ETE transactions. Throughout the second part of this paper, we focus on IP auctions as one particular business model of the archetype “IP Broker”. We investigate this “young” business model presenting first insights into two qualitative studies. In a first step we derive a generic IP auction process based on a qualitative, empirical analysis of IP auction processes. We then translate these results into a theory based process view and derive a generic IP auction process as a specific type of an ETE process. Having thus generated a close understanding of the transaction process, we presented results from four cases of successful transactions, i.e. where patents were sold for particular high prices from two SMEs and two MNCs. The case studies are analyzed according to four main aspects including characteristics of the companies that exploited patented technologies (including motives and selection processes), the patented technology as such, the organization of the transaction and the companies’ perceptions regarding the success of the transactions. --