Laura Martin Real Option Case

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Laura Martin: Real Options and the Cable Industry Laura Martin: Real Options and the Cable Industry Introduction Laura Martin was an equity research analyst for cable stocks, who accepted that the most ideal approach to value cable stocks was through innovative strategies, for example, real option and not through more customary or common valuation systems, for example, EBITDA multiples, Return on Invested Capital (ROIC) and Discounted Cash Flow (DCF) analysis. In the conference held by the Credit Suisse First Boston in 1999, Laura Martin presented the real option strategy for the valuation of cable stocks in-front of the CEO of Adelphia Communication, AT&T’s Cable Operations, and Cox Communication that also included the VC of Comcast Communications. She also needed to have the chance to exhibit her learning of the drivers of value in the cable business. The primary motivation behind Laura Martin’s argument about real option was the right technique for valuing cable stocks; which was primarily determined by the development that this industry was experimenting. In this time period, cable organizations were overhauling their cable infrastructure to meet the 750 MHz of bandwidth speed limit, which left unused data bandwidth limit that could be utilized for other interactive services or services that did not exist at that time. Laura Martin believed that the EBITDA as multiplier and the DCF valuation approaches did not evaluate this reasonable income stream; which she named “Stealth Tier”. Her analysis prompted a higher stock value by using the real option valuation approach and for the lower values by using afore mentioned traditional approaches. Industry Current Situation: * Analog Video Revenue * New technology and new sources of revenue * Digital Video * High speed data * Cable Telephone * Consolidation of
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