A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Adminishation, School of Management

Research report (M.Sc.) - Asian Institute of Technology, 2003

The internet companies began to boom in China in the late 1990s, started as simple dot.com or pure play click companies and evolved gradually to integrate the new technologies in the traditional old economy firms, using the internet to connect more effectively with customers, suppliers and other partners. This as a matter of fact leads to the improvement in productivity and the increase of market share. But the dot.com companies suffered from the lack of profits and business models and only those firms which are capable of using successfully the new leverage of web technology in their business model will come out to be the winners. The traditional valuation techniques, such as DCF, multiples or EVA, are not able to quantify the worth of internet companies. The theory of real options has therefore been put forward as an alternative to the traditional methods for the valuation of internet companies to capture the real worth of these companies at a particular point in time. This paper tries to study the suitability of the real option approach to evaluating internet companies and the problems associated with it both conceptually and practically. Some recommendations have been made for the valuation of Chinese internet companies.