Exploring Parallel Compound Real Options in MNCs International Transactions

Abstract

This paper investigates the valuation of international acquisitions of multinational corporations (MNCs) using real options theory, focusing on L’Oréal’s acquisition of Aesop. It explores how MNCs create growth and deferral options simultaneously in M&A deals, enhancing market value and promoting sustainable practices. The study addresses two key questions: the role of MNCs in advancing sustainability and the measurement of market value added through parallel compound options. Using L’Oréal’s acquisition of Aesop as a case study, the paper demonstrates the strategic benefits of combining growth and deferral options. Examples include L’Oréal’s expansion into new markets like China, leveraging Aesop’s sustainable practices, and achieving competence-based collaborative synergies. The findings provide a framework for assessing collaborative synergies in international transactions, contributing to the literature on strategic management, international business, and financial management. In conclusion, the paper highlights the importance of strategic flexibility and sustainability in MNC acquisitions, offering valuable insights for future research and practical applications in international business.

1. Introduction

Studying the growth option value implied in multinational investment applies to a wide range of international strategy research. Previous studies have examined how multinational investment aligns incremental strategy with environmental uncertainty, highlighting the importance of growth options in international expansion (Belderbos et al., 2019). This literature primarily focuses on the relationship between the degree of multinationality and firms’ overall performance indicators.

In parallel, the study of collaborative synergies in mergers and acquisitions (M&A) has explored the applicability of deferral options to measure the added market value. Traditionally, growth and deferral options have been considered independently, often as dueling options. However, this paper argues that international transactions, such as M&As, create two options simultaneously: the growth option (international expansion) and the deferral option (future collaborative synergies).

Because both options are active simultaneously, this is called a parallel compound option. Compound options involve options on options, and they can either be sequential or parallel, also known as simultaneous because both options are available at the same time (Kodukula & Papudesu, 2006). This paper aims to explore the concept of parallel compound options in international transactions and empirically examine their applicability in valuing the market value added in international transactions.

The focus on international business (IB) is justified for several reasons. First, internationalization has been recognized as a provider of real options that are not always available to domestic companies (Driouchi & Bennett, 2012). Second, while there is extensive literature on the relationship between uncertainty and capital investment, the effect of uncertainty on international transactions remains mixed and under-explored (Vo & Le, 2017). Third, multinational corporations (MNCs) play a crucial role in the implementation of Sustainable Development Goals (SDGs), and their role in achieving the United Nations SDGs has become an attractive research area (Leonidou et al., 2024).

Moreover, Vo and Le (2017) encourage future research to derive finer-grained measures of growth option value by collecting more detailed data on firms’ investment projects and their management of such projects over time. This necessitates other research methods such as case studies (Loch & Bode-Greuel, 2001; Smit & Trigeorgis, 2004). This paper contributes to this scientific request by addressing three key research questions. First, how can we measure the sustainable value added when MNCs’ international acquisition simultaneously creates two options: the growth option (international expansion) and the deferral option (collaborative synergies)? Second, what is the role of MNCs in promoting sustainable practices, and how do MNCs transfer sustainable practices from an acquirer to a target in M&A deals? Third, how can we integrate ESG scores in real option valuation for MNCs international transactions?

In this context, L’Oréal’s recent acquisition of Aesop for USD $2.525 billion serves as a very convenient case study to answer these research questions. M&A activities like this allow companies to expand their market presence, diversify their product offerings, and generate competence-based collaborative synergies (Čirjevskis, 2020). L’Oréal recognized the increasing demand for sustainable and ethically produced beauty products, and Aesop’s strong commitment to using natural ingredients and sustainable sourcing aligned well with L’Oréal’s sustainability objectives. For L’Oréal, acquiring Aesop, a brand known for its high-quality, sustainable products, aligns with its goal to dominate the luxury beauty market (Klasa & Abboud, 2023).

The causal link between the two options is implicitly established through the strategic flexibility they provide. For example, L’Oréal can pursue growth in China (growth option), while deferring decisions about how to integrate Aesop’s sustainable practices (deferral option) until more information is available. However, one must be executed (buying Aesop) before the other is engaged (generating synergies). This is consistent with the definition provided by Kodukula and Papudesu (2006, p. 157), who describe parallel options as those that exist concurrently rather than sequentially.

Kodukula and Papudesu (2006) argued that telecommunication companies, which can initiate infrastructure upgrades at any time, must first obtain a spectrum license before testing the upgrade and launching the service. This situation creates a parallel option, as both the option to purchase the spectrum license and the option to invest in the infrastructure upgrade are available simultaneously. The license purchase must be exercised before the infrastructure upgrade, making these projects a parallel compound option (Kodukula & Papudesu, 2006, p. 157). Loch and Bode-Greuel (2001) explored the application of real options in pharmaceutical R&D, emphasizing the significance of parallel options in handling uncertainty and enhancing value. For instance, a pharmaceutical company may simultaneously invest in multiple drug development projects, with each project acting as a parallel option. This strategy enables the company to spread risk and boost the chances of success.

The paper engages with the foundational literature on real options, including Kodukula and Papudesu (2006), Trigeorgis and Reuer (2017), and Copeland and Keenan (1998), who discuss the application of compound options in strategic decision-making. After providing reasoning for applying parallel options in other contexts (e.g., pharmaceuticals, infrastructure projects), the paper focuses on the unique application of parallel compound options in M&A. This is a novel contribution to literature, as M&A transactions often involve both growth and deferral options that are exercised simultaneously. The paper builds on Čirjevskis’ previous work (e.g., Čirjevskis, 2021, 2022b, 2023, 2024) to justify the use of real options in M&A, particularly in the context of collaborative synergies and sustainability.

The author also selected this unique case study, the L’Oréal acquisition of Aesop, to examine parallel compound real options in multinational corporations’ international transactions for two reasons. First, this strategic move is intriguing and quite “unconventional” for the French beauty giant. L’Oréal typically follows a cautious approach of acquiring smaller brands and gradually expanding them internationally (BSIC, 2023). Second, some analysts believe that L’Oréal may have paid too much for Aesop (Blake, 2023; CBINSIGHTS, 2023). In this context, the strategic benefits of this deal can be analyzed through the concept of parallel compound options.

In the study of L’Oréal’s acquisition of Aesop, the growth option involves expanding L’Oréal’s market presence and product offerings through the acquisition of Aesop. The deferral option involves the potential future synergies created through the integration of Aesop’s sustainable practices and core competencies with L’Oréal’s existing operations. This approach allows L’Oréal to exercise either option or both, depending on the strategic settings, and helps to achieve a fair estimation of the value added by this sustainable deal.

The main theoretical and empirical contribution of the paper is the new methodological approach to parallel compound real option application to M&A deals, which provides a more accurate valuation of collaborative synergies. In general, the methodological approach presented in this study provides a comprehensive framework for valuing real options in M&A transactions. By combining growth and deferral options into a parallel compound option, this approach helps ensure a full and fair valuation of the synergies created through the acquisition.

The succeeding parts of this paper are organized as follows. The key literature section provides a discussion of the valuation computations for parallel options and compound sequential options, with a focus on the small changes required for each. The methods section presents a binomial solution for the parallel compound option parameters, solved using a five-step procedure in the empirical part of the paper. Data analysis, interpretation, and findings are presented in the conclusion section.

2. Key Literature Review

The principles of real options theory have been applied in strategy to overcome the limitations of the net present value (NPV)-based decision-making tool. The NPV often fails to recognize the benefits of risk and uncertainty, as it decreases with increasing risk (Chung et al., 2013; Ragozzino et al., 2016).

2.1. Comparing Synergy Valuation: Real Options vs. Discounted Free Cash Flow (DFCF) Methods

Traditionally, the net present value (NPV) of a project is determined using discounted free cash flow (DFCF) methods, which are the most employed techniques for assessing capital budgeting effectiveness in corporate finance. This is because the discount rate in traditional DFCF analysis reflects the return rate investors would expect if the investment were a traded asset. Although DFCF is the most prevalent method for investment valuation, standard NPV techniques do not account for the flexibility inherent in the investment process (Benninga & Mofkadi, 2022). Recognizing managerial flexibility as a real option (a right but not an obligation) is a crucial extension of NPV analysis.

The main concept in corporate finance literature is that “the net present value of future cash flows is influenced by the size, timing, and uncertainty of those cash flows” (Feldman & Hernandez, 2022, p. 558). A sensitivity analysis of NPV in acquisitions, based on varying interpretations of the weighted average cost of capital (WACC), terminal value (TV), and DFCF constant growth rate (g), can enhance the dynamic nature of synergy valuation in mergers and acquisitions (M&As), but cannot predict the impact of post-merger synergies such as relational, network, and non-market synergies (Čirjevskis, 2021).

Real Options Theory (ROT) highlights the value of phased investments in uncertain contexts (Trigeorgis & Reuer, 2017). While all profits eventually manifest as revenue increases or cost reductions, Feldman and Hernandez (2022) “encourage M&A scholars and practitioners to expand the concept and measurement of the total value of an acquisition” (p. 31). They hope that future research will go beyond measuring and assigning gains and losses to address the fundamental question of how mergers create or destroy value (Feldman & Hernandez, 2022).

In this context, applying real options helps to estimate synergy in terms of market value added, not just cost savings or revenue increases (Čirjevskis, 2020). Valuing M&A synergies through real options can provide practitioners with a clearer strategic view of the synergism in an M&A deal (Čirjevskis, 2020). Therefore, the total market value added by the M&A deal can be seen as the sum of various types of synergies identified by Feldman and Hernandez (2022) and valued through real options.

2.2. Real Options Reasoning and Valuation

Real options theory, derived from financial options theory and first identified by Myers (1977), involves making investments in non-financial assets (e.g., companies, land, patents) where downside risk is limited while retaining access to upside potential under uncertainty (Ragozzino et al., 2016; Trigeorgis & Reuer, 2017). Martin and Lamothe Fernández (2006) considered the application of real options as a quantitative valuation method. They applied this method to a sample of European companies, supporting the use of real options theory for valuing biotechnological firms.

Iazzolino and Migliano (2015) proposed the application of a real options approach to value intangible assets, such as patents, arguing that the net present value (NPV) method presents challenges when evaluating intangible activities (Iazzolino & Migliano, 2015, p. 99). They contended that traditional discounted cash flow (DCF) methods do not adequately capture the value of innovations, particularly intangible assets (Martin & Lamothe Fernández, 2006; Iazzolino & Migliano, 2015, p. 100).

In international business (IB), an example of a real option is when an MNC acquires a foreign affiliate to enter a new market. This acquisition is a real option, giving the purchaser the right to buy or sell an asset at an agreed price in the future, generating added value when exercised. Moreover, recent studies by Beladi et al. (2022) applied a real options model to investigate the ownership share choices of international joint venture (IJV) firms. Their study considered a project where the IJV firm could adjust (increase or decrease) its capacity after the initial capital investment, rather than being limited to a fixed capacity scale (Lee, 2004).

In this context, a real option is an agreement between a buyer and a seller that grants the buyer the right to buy or sell a specified asset or liability at a predetermined price (known as the exercise or strike price) at a future date. An option is considered “in the money” when exercising it would result in a gain, or the current research market value added. For instance, if a buyer anticipates this gain by exercising the option to purchase their partner’s share, the option would be “in the money”.

Real options theory has two broad applications: real-options-reasoning and real options modeling (also known as real options valuation or pricing) (J. Li, 2007). Real-options-reasoning, adapted real-options logic for strategic decision-making, offers advantages for resource allocation under uncertainty (McGrath, 1997). However, it lacks scholarly consensus on its properties, yet it can be an intuitive decision-making metaphor (McGrath et al., 2004). Formal modeling of real options, common in the financial economics literature, requires specificity and transparency about assumptions to address multiple sources of uncertainty (Trigeorgis & Reuer, 2017). Recent studies have further explored the integration of real options with dynamic capabilities (Čirjevskis, 2022b) and game-theoretic aspects of investment (Smit & Trigeorgis, 2010).

Investments in growth options have received substantial attention in both managerial practice and academic research (Kester, 1984; Tong et al., 2008). Firms acquire growth options by pursuing opportunities with significant future upside potential while containing downside risk (Belderbos et al., 2014). Examples include geographic expansion, brand development, and productive asset investments (e.g., patents, and platform technologies). Market entry decisions often incorporate real options due to substantial uncertainty in new markets. Early entry value is enhanced by future growth options via preemption and learning advantages (Belderbos et al., 2019; Folta & O’Brien, 2004). Acquiring growth options lowers the threshold for market entry, making it more attractive (Petersen et al., 2000). Recent studies have highlighted the importance of real options in strategic decision-making and their impact on organizational performance (D. Li et al., 2022).

2.3. Valuing Collaborative Synergies with Compound Parallel Real Options

Real options have also been used in strategy research to investigate how organizations generate VRIN resources and core competencies, and how managers perceive opportunities to create and leverage options (Chintakananda et al., 2024). Combining the resource-based view (RBV) and dynamic capabilities framework with real options theory sheds light on firm-level collaborative synergies. The process of absorbing and integrating merging partners’ core competencies and dynamic capacities can be viewed as learning options (Kodukula & Papudesu, 2006), serving as deferral options for achieving collaborative synergies. Real options complement the RBV, offering insights into achieving and sustaining competitive advantage (Chintakananda et al., 2024; Helfat & Raubitschek, 2000; Klingebiel, 2012).

In this context, Chintakananda et al. (2024) believe that, given the similarities between the two viewpoints, integrating real options and dynamic capabilities perspectives has the potential to strengthen our understanding of how firms manage dynamic capabilities generating new core competencies. Using various staging and sequencing strategies, merging businesses can develop new core competencies for knowledge acquisition and exploitation (Bowman & Hurry, 1993).

Integrating real options with RBV and dynamic capabilities explains how corporations employ adaptation and learning capabilities to produce added market value, or exercise study or learning options (both deferral options). Study options involve acquiring dynamic capabilities and core competencies from the target company, while learning options involve generating collaborative synergy over time (Copeland & Keenan, 1998; Mun, 2003; Steigenberger & Ebers, 2023). The primary objective of M&A integration is to maximize synergies, defined as the potential of united firms to generate more value together than individually (Steigenberger & Ebers, 2023). Recent research has explored advanced real options applications, such as rainbow real options, to measure patent-based collaborative synergies in high-tech M&A (Čirjevskis, 2024).

As a result, it is possible to conclude that in the current scenario of purchasing an overseas affiliate with their core competencies (growth option), and the integration of these core competencies in the target’s company (learning option), corresponds to the deferral option, where the duration of time exercising the option is the expectation of the management to obtain competence-based collaborative synergies.

Valuing these synergies requires methods like real options, discounted cash flow (DCF), and other financial models (Hull, 2012; Kodukula & Papudesu, 2006). Successful M&A transactions, such as L’Oréal’s acquisition of Aesop, demonstrate significant collaborative synergies, contributing to long-term value and competitive advantage. Recent research has developed frameworks to predict explicit synergy and measure tacit competence-based synergies in M&A deals (Čirjevskis, 2022a).

A compound option exists when one real option’s value depends on another, and not on the underlying asset (Copeland & Keenan, 1998). Geske’s (1979) seminal work on compound options provides a Black–Scholes-type formula for valuing compound options, highlighting their complexity and added value compared to simpler models. Chen’s (2013) study extended the Geske compound option model to incorporate random interest rates, comparing it to simpler models and showcasing the benefits of using compound options in credit risk modeling.

Moreover, Breton and Ndoye (2021) proposed an analytical formula for compound options under regime-switching dynamics, comparing their performance to simpler models, and demonstrating their effectiveness in capturing market behaviors. Overall, Geske’s compound options model has provided a more comprehensive framework for understanding and managing financial risk, influencing both theoretical research and practical applications in modern finance.

Compound options can be sequential or parallel. Sequential options require exercising one option to create another, while parallel options allow both options simultaneously. Acquiring a target organization provides another option for creating competence-based collaborative synergies (Čirjevskis, 2020). Recently, Čirjevskis (2023) integrated sequential compound real options with real options that have changing volatility in order to evaluate collaborative tacit synergies (a value in development) of sequential international acquisitions (Čirjevskis, 2023). Valuation computations for compound sequential and parallel options are nearly identical, with small differences (Kodukula & Papudesu, 2006). This paper explores the valuation of parallel compound options in M&A, using a binomial solution and empirical analysis. Thus, the following proposition is made.

Proposition 1.

When an international holding acquires a foreign affiliate, collaborative synergy can be valued as a parallel compound option that includes both the growth option (expansion) and the deferral option (future collaborative synergies.

MNCs play a crucial role in promoting sustainable practices and achieving SDGs. They integrate sustainability into business strategies through sustainable sourcing, production methods, and corporate social responsibility initiatives (Peters & Simaens, 2020; Driouchi & Bennett, 2012). Sustainability initiatives impact financial performance and market value, with both positive outcomes and challenges (Vo & Le, 2017). L’Oréal’s “L’Oréal for the Future” program exemplifies ambitious sustainability commitments, leveraging acquisitions like Aesop to enhance overall sustainability efforts. Recent studies have reviewed strategic approaches to sustainability in MNCs, highlighting frameworks, practices, and challenges in achieving sustainable development (Abdul-Azeez et al., 2024).

2.4. Linking Sustainability in MNCs and Real Option Valuation

The introduction of Environmental, Social, and Governance (ESG) scores has become essential for investment decisions and reducing portfolio risk. Research by Demartis and Rogo (2024) shows that increasing assets with top ESG scores can decrease potential portfolio losses. This highlights the significance of incorporating high ESG scores into portfolios to mitigate market risk. Moreover, during periods of market stress, the effect of ESG scores on Value-at-Risk (VaR) is more significant, showing that sustainable assets are more resilient during crises (Demartis & Rogo, 2024).

Incorporating sustainability into real options valuation is essential for multinational corporations (MNCs) seeking long-term value and a competitive edge. Sustainable practices can boost the value of real options by mitigating risks related to environmental, social, and governance (ESG) factors. However, recent research shows that portfolios with high ESG scores tend to have lower volatility and, hence, lower returns, resulting in reduced Sharpe ratios because the lower volatility does not offset the lower returns (López Prol & Kim, 2022). Consequently, an MNC that implements sustainable sourcing and production methods can reduce supply chain risks, which may inadvertently lower the value of its real options.

Generally, higher risk can increase the value of an option because it provides more opportunities for favorable outcomes. This is because options give the holder the right, but not the obligation, to make certain decisions, allowing them to capitalize on positive developments while avoiding negative ones. However, in real options valuation, the relationship between risk and option value can be complex (Alexander & Chen, 2021).

When risk is reduced, the potential for extremely positive outcomes diminishes, which can lower the option’s value. However, this is not always straightforward, as other factors like the specific nature of the project, the timing of decisions, and the overall market conditions can also influence the option’s value (Alexander & Chen, 2021).

Moreover, sustainability initiatives can create new real options for MNCs. For instance, investing in renewable energy projects can provide MNCs with the option to expand their sustainable energy portfolio in the future. This not only aligns with global sustainability goals but also enhances the firm’s strategic flexibility and resilience.

In conclusion, the link between sustainable practices and real option valuation is evident in the strategic decisions of MNCs. By integrating sustainability into their valuation models, MNCs can better assess the long-term value and potential synergies of their investments, ultimately contributing to sustainable development and competitive advantage. Hence, the following proposition is made.

Proposition 2.

Incorporating sustainability into real options valuation strengthens the competitive edge of multinational corporations (MNCs) by mitigating risks related to environmental, social, and governance (ESG) factors, which can inadvertently decrease the value of their real options.

3. Methodological Approach

The objective of this methodological approach is to explore the potential captured value added from the future business expansion of the acquirer by obtaining explicit competence-based synergies (Čirjevskis, 2020). Conversely, the value of a deferral option in this research is equal to the value of tacit synergies based on a new set of core competencies development, which is currently uncertain (Čirjevskis, 2022a).

3.1. Real Options Valuation Framework

To assess the real options in M&A deals, this study employs a parallel compound option framework that combines growth and deferral options. The parallel compound option approach allows for simultaneous consideration of both options, providing a comprehensive valuation of the potential synergies created through the acquisition. The valuation framework involves the following five steps. The overall research model is presented in Figure 1.

The central element of the overall research model is the binominal option pricing lattices. The binominal lattice model is a widely used method for valuing real options due to its flexibility and simplicity. It involves discretizing the continuous time and price movements of the underlying asset into a series of discrete steps, forming a binomial tree. Each node in the tree represents a possible future state of the underlying asset, with the option value calculated at each node. The binomial lattice model is particularly suitable for valuing parallel compound options, as it allows for the simultaneous consideration of multiple options.

The binomial lattice model involves the following steps. First, the binomial tree is constructed by dividing the time to maturity into a series of discrete intervals. At each interval, the underlying asset can move up or down by a particular factor, reflecting the asset’s probable future values. Second, the option values are calculated at each node of the binomial tree using the risk-neutral valuation approach. This involves discounting the expected future option values at each node back to the present value using the risk-free rate. Third, the option values for the dependent option, obtaining collaborative synergies, are calculated first, and these become the underlying asset values for the choice of acquiring the target company.

3.2. Embedding Environmental, Social, and Governance (ESG) Scores in Real Option Valuation

The relationship between ESG performance (ESG) and corporate financial performance has been explored both theoretically and empirically, utilizing various indicators and models to examine their dynamics (Mandas Lahmar et al., 2024). However, it remains closely tied to real options theory. Real options provide a framework for making investment decisions under uncertainty, and they can be particularly useful in the context of sustainability. This flexibility is crucial for sustainability initiatives, which often involve long-term commitments and uncertain outcomes. Real options valuation can quantify these uncertainties, incorporate them into the decision-making process, and ensure that the sustainability initiatives are appropriately valued.

Sustainability initiatives can reduce the risks associated with environmental, social, and governance (ESG) factors. These have several theoretical underpinnings. First, the author has adopted the integration of Value-at-Risk into Real Options Valuation (Alesii, 2005). Value-at-Risk (VaR) regarding the market value of companies is a statistical measure used to assess the potential loss in the market value of a company’s equity over a specific time frame, given normal market conditions (e.g., Hull, 2012). Alesii (2005) demonstrated that integrating VaR with real options is beneficial for managing operational risks and enhancing shareholder value.

Second, the author has adopted a new risk metric, Value-at-Risk ESG (Capelli et al., 2024), which combines a traditional market risk measure, expressed in terms of Value-at-Risk (VaR), with environmental, social, and governance (ESG) factors using the variance-covariance method. Capelli et al. (2024) argued that their predictive metric of expected losses, which integrates the financial VaR and ESG risk, provides a more conservative and accurate risk measure by considering ESG factors. In this context, the paper proposes a new methodology for decomposing VaR ESG by measuring the Component VaR ESG (CVaR ESG) of an acquirer’s and target’s market values, similar to a multi-asset financial portfolio (Capelli et al., 2024).

The methodology is as follows:

• Decompose VaR ESG into CVaR ESG for both the acquirer and the target using a bottom-up approach.
• Calibrate VaR ESG with an interaction factor (J) that varies based on the total ESG risk scores (e.g., Sustainalytics, 2025) of the acquirer and the target. These scores are used to adjust the covariance matrix to account for ESG factors.
• Identify the maximum contribution of risk appropriate for each partner’s market values.
• Adjust parameters required for the binomial model and BSOPM to reflect risks using VaR ESG, namely, the underlying asset value (So), acquisition value (K1), and hypothetical future market value of collaborative partners as separated entities working independently (K2).
• Using adjusted parameters of real options based on ESG factors, calculate the collaborative synergies of an M&A deal by employing parallel compound real options.

This calculation provides a more comprehensive and accurate valuation of the acquisition synergies and risks by incorporating ESG factors. Therefore, this paper theoretically integrates sustainability ESG factors into real options valuation for further empirical validation. The empirical validation of the proposed methodology in Section 3.2 can be quantitatively justified in forthcoming research.

This methodology can provide a more accurate and holistic valuation of acquisition synergies and risks by accounting for ESG factors. This can lead to a better understanding of the true value of potential investment and can help identify potential risks related to environmental impact, social responsibility, and governance practices that might not be captured through traditional financial metrics and simple real options. In general, parallel compound real options enable organizations to navigate complex investment landscapes with greater precision and confidence, ultimately leading to a better assessment of their financial and strategic outcomes.

3.3. Empirical Application: Case Study—L’Oréal’s Acquisition of Aesop

According to cross-case methods of case selection and analysis (Seawright & Gerring, 2008), the case study of the Aesop acquisition can be characterized as a case study that deviates from some cross-case relationships on acquisitions of L’Oréal, like the largest acquisition in the company’s history. The nature of the unique case study of L’Oréal’s acquisition of Aesop is exploratory, and the usage of this case study justifies the theoretical propositions provided.

When it comes to sampling, Eisenhardt and Graebner (2007) suggest that using a single case is suitable when investigating a phenomenon-driven research question that asks “how”. Each case can be considered a distinct experiment that can be replicated (Yin, 2009). Siggelkow (2007) also points out that research focusing on a single case can serve as a very compelling example.

Based on cross-case methods of case selection and analysis (Seawright & Gerring, 2008), the Aesop acquisition case study is considered a unique case study, differing from some cross-case relationships in L’Oréal’s acquisitions. This acquisition, the largest in the company’s history, exceeded the 2008 YSL Beauty acquisition by USD $1.7 billion. Additionally, Seawright and Gerring (2008) suggest that a unique case study can be used as a high-residual case or an outlier. Outliers can show unique contexts that are worth investigating.

This case study consists of two phases, with the first phase being a unique case study. Sekaran and Bougie (2018) state that the validity of qualitative case study research hinges on how accurately the findings reflect the collected data (internal validity) and their applicability to different contexts (external validity). One major advantage of case study research is the ability to deeply investigate a small number of selected samples, or even a single case study (Yin, 2018). However, a significant drawback of using secondary data is that the secondary researcher was not present during the data collection process and is, therefore, unaware of the exact methods used.

Second, the empirical application of the methodological approach is demonstrated through the case study of L’Oréal’s acquisition of Aesop. This acquisition provides an excellent example of how parallel compound options can be used to value the synergies created through M&A transactions. The data required for the empirical application includes historical financial data for L’Oréal and Aesop, market information, and estimates of key parameters such as volatility and the risk-free rate.

These data are collected from various sources, including financial statements, market reports, and databases. The analysis involves using the binomial lattice model to calculate the option values and conducting a sensitivity analysis to assess the robustness of the results. The findings are then interpreted to provide insights into the value of the synergies created through L’Oréal’s acquisition of Aesop.

The empirical application of L’Oréal’s acquisition of Aesop demonstrates the theoretical novelty and practical utility of this approach and provides valuable insights into the valuation of collaborative synergies of M&A transactions.

4. Empirical Context: L’Oréal’s Acquisition of Aesop in 2023

On 3 April 2023, L’Oréal agreed to purchase the Australian high-end cosmetics brand Aesop from its Brazilian owner, Natura & Co, for an enterprise value of USD $2.525 billion (Guilbault, 2023). Under Natura & Co’s management from 2012 to 2022, Aesop expanded from over 80 physical stores in 14 countries to 269 stores in 27 countries, with their revenue increasing nearly 20 times from USD $28 million to USD $537 million (BSIC, 2023).

Despite this deal being relatively small compared to L’Oréal’s market capitalization of around EUR 222 billion at the time, it is the largest acquisition in the company’s history, surpassing the 2008 acquisition of YSL Beauty by USD $1.7 billion. Over the last decade, Aesop’s sales grew from USD $22 million to $537 million, expanded its store network from 52 to 395, and increased its market presence from 8 to 29 countries (BSIC, 2023).

The primary growth opportunity for Aesop lies in China, the largest and fastest-growing market for luxury goods and cosmetics. With Aesop having recently opened its first retail outlet in China, this market was expected to significantly contribute to revenue growth and help L’Oréal achieve its goal of making Aesop one of its billionaire brands, those with over USD $1 billion in sales (May, 2024).

Multinational corporations (MNCs) play a crucial role in promoting sustainable practices by setting industry standards, investing in sustainable technologies, and influencing their supply chains. In this context, L’Oréal has ambitious sustainability commitments under its “L’Oréal for the Future” program, which aims to reduce the environmental impact of its products and operations. By integrating Aesop, known for its sustainable and vegan formulations, L’Oréal could leverage Aesop’s practices to enhance its overall sustainability efforts and generate competence-based collaborative synergies. This includes promoting the use of plant-based ingredients and sustainable packaging across its other brands (L’Oréal Group, 2023).

According to the valuation framework provided above, the first step is the identification of real options. By acquiring Aesop, L’Oréal has expanded its international presence, gained access to new markets, and benefited from complementary product lines, potentially increasing its revenue and market share. Additionally, L’Oréal can choose to wait for the synergies between L’Oréal and Aesop to materialize over time, including the exploitation of shared VRIN resources, core competencies, and dynamic capabilities. This deferral option provides L’Oréal with flexibility and the potential to create additional value through synergistic strategic decision-making. Thus, in the case of L’Oréal acquiring Aesop, both the growth option and the deferral option can be combined into an identified parallel compound option.

Next, the second step is the identification of the parameters required for the real option valuation. The measurement of collaborative synergies from this deal was conducted using parallel compound options with the application of the Black–Scholes Options Pricing Model (BSOPM) via the DerivaGem 2.0 program (Hull, 2012) and the Binomial Option Pricing Model (BOPM) employing binomial lattices. The parameters for the real options binomial option pricing model, underlying values, and real options lattices are given below in

Table 1. The parameters of real options and data in detail: L’Oréal acquisition of Aesop.

Parameters of Financial Options	The Parameters of Real Options and Data
Stock price (So)	The cumulated market values of L’Oréal and Aesop as separated entities (four-week average) before the announcement of the acquisition were as follows: L’Oréal’s market capitalization on 4 March 2023 was USD 216.83 bn, and on 1 April 2023 was USD 236.25 thus, the average market value of L’Oréal was USD 226.25 bn (CompaniesMarketcap.com, 2025). Vogue Business has disclosed a USD 2.525 bn price that L’Oréal would have paid to Aesop (Guilbault, 2023; BSIC, 2023). Therefore, the cumulated market values of L’Oréal and Aesop as separate entities (four-week average) before the announcement of the acquisition (So) was USD 228.78.
The strike price (K1)	L’Oréal is acquiring the Australian brand Aesop in a deal valued at USD 2.53 billion, marking the largest brand acquisition ever made by the French beauty giant (Toh, 2023). Consequently, the investment in the growth option (the first independent option, (K1) amounted to USD 2.53 billion.
The strike price (K2)	The hypothetical future market value of L’Oréal SA as a separate entity without the acquisition of Aesop was forecast by the EV/EBITDA multiple. L’Oréal’s twelve months of the 2022 year, ev/EBITDA multiple was 21.9×, (Finbox.com, 2025b). The L’Oréal 2022 annual EBITDA was USD $8.291 bn (Finbox.com, 2025a) thereby, the hypothetical future market value of L’Oréal without the acquisition of Aesop was USD 181.57 bn. Bloomberg Intelligence said the acquisition of Aesop could equate to over 4.2× sales and 20× EBITDA (Rozario, 2023). 2022-year Aesop’s sales were USD 537 M and EBITDA was BRL 536.7 M (Statista, 2025) or USD 106.7 M (USD 1 was BRL 5.03, Trading Economics, 2025a). The forecasted market values of Aesop, working independently from L’Oréal, were USD 2.26 bn using sales multiple and USD 2.13 bn using EBITDA multiple, and an average future value is USD 2.2 bn. Thereby, the sum of hypothetical future market values as separated entities working independently of both corporations (strike price) was USD 181.57 bn plus USD 2.2 bn, equaling USD 183.77 bn.
Stock volatility (σ) of L’Oréal within the first week after the announcement of the acquisition of Aesop	L’Oréal’s historical volatilities within the first week after the announcement of the acquisition of Aesop on 11 April 2023 was 22.15% (V-Lab, 2025).
Risk-free rate (r)	On 3 April 2023, France’s 10-year Government Bond Yield was 3.286 percent. The yield on France’s 10-year OAT (Obligations assimilables du Trésor) stood at around 3.3%, in line with its European peers. (Trading Economics, 2025b).
Time to maturity (T)	One year following Dunis and Klein’s (2005) recommendations.
Time increment (δt)	For a year, two-month time intervals were used to account for variations in the binominal lattice-based real options method’s up and down factors.

Source: developed by the author.

and

Table 2. Real options parameters: L’Oreal’s acquisition of Aesop.

Rainbow Real Options Parameters and Data
Time increment: ΔT (years)	0.17
Up factor: $u={\mathrm{e}}^{\mathsf{\sigma }1\surd ∆\mathrm{T}}$	1.095
Down factor: $d={\displaystyle \frac{1}{u1}}$	0.914
Risk-neutral probability: $p1={\displaystyle \frac{{\mathrm{e}}^{\mathrm{r}∆\mathrm{T}}-\mathrm{d}}{\mathrm{u}-\mathrm{d}}}$	0.508

Here, p is risk-neutral probabilities; u is the value of up nodes; d is the value of down nodes; e = mathematical constant of exponential function; rf = risk-free rate; ΔT = stepping time. Source: Developed by the author.

.

L’Oréal has parallel options that are embedded in the acquisition deal with Aesop; one is to directly acquire Aesop, and the other is to generate collaborative synergy. Both options have the same timeframe, but the acquisition must be completed before the synergy is created by the partners. The calculations for these options are similar to those for sequential options. Initially, the values for the dependent option (the generated synergy) are determined, which then serve as the underlying asset values for the option to acquire Aesop.

The next step involves modeling the identified options using a binomial lattice method. A binomial tree was constructed with two-month intervals over one year. This tree illustrates the potential future states of the underlying asset (e.g., the combined value of the acquirer and target) as upper digits, and the corresponding real options lattice of the option values as lower digits at each node.

The binomial option pricing lattice starts with “A” at the initial node on the left. It then multiplies “A” by the up and down factors to derive “B” and “C” nodes, respectively, for the first step. Progressing to the right, the binomial lattice repeats this sequence for each node in the tree until the final time-step. The top value at each node represents its asset value, as illustrated in Figure 2.

Therefore, the value of the underlying asset will bifurcate at each time step in the lattice, increasing by the up factor (u) and decreasing by the down factor (d). These parameters depend on both the duration of the real option and the implied volatility of the underlying assets (Mun, 2003, p. 74). Following the development of the underlying lattice, the real option valuation lattice or decision tree lattice (Copeland et al., 2000) has to be built.

Real options attain maturity at the terminal nodes, according to Kodukula and Papudesu (2006, p. 79). Therefore, the real options value at the terminal nodes needs to be identified by deducting the exercise price—“K1” from the share price—“So”. For example, the option value of the terminal “V” node equals USD 209.83 bn, which is USD 393.60 bn minus USD 183.77 bn.

The value of the embedded real options is then found by back-calculating (also known as “rolling back”) the lattice to the initial node, using a risk-neutral probability formula for the up and down nodes of the real options lattice, as Borison (2005) notes. This is the discounted (at the risk-free rate) weighted average of hypothetical future option values with risk-neutral probability weights. Formula (1) of the intermediate value that was recommended by Mun (2002, p. 157), as follows:

$$\mathrm{I}\mathrm{V}=\left[\left(\mathrm{p}\right)\mathrm{u}\mathrm{p}+\left(1-\mathrm{p}\right)\mathrm{d}\mathrm{o}\mathrm{w}\mathrm{n}\right]{\mathrm{e}}^{-{\mathrm{r}}_{\mathrm{f}}∆\mathrm{T}}$$

(1)

For example, the value of “P” was calculated as node equals, as follows: ((0.508 × (209.83) + (1 − 0.508) × (144.71)) × EXP(−0.033 × 0.17)) equals USD 176.80 bn. Hence, the real option valuation lattice is computed back to the first node (where the “A” node was initially input) via the backward induction procedure. Real options proponents view the value of the real option in the initial node as the “fair value” of any options (Mun, 2003, p. 98).

Next, a sensitivity analysis was conducted using Greeks (Hull, 2012) to assess the impact of changes in key parameters on the option values as well as the use of the Black–Scholes equation for options valuation as shown in Figure 3. This helps us to understand the robustness of the valuation results and identify the most critical factors influencing the option values.

The BSOPM and BOPM both yielded the same valuation for the dependent option (collaborative synergies), amounting to 53.73 billion. Then, the dependent deferral option (gaining synergies) values are used as the underlying asset values for assessing the option values for the independent growth option (such as buying the Aesop) as shown in Figure 4.

One significant challenge with the real options approach to valuing collaborative synergies, especially regarding how the purchase price affects the evaluation of the synergetic effect (Nazarova & Koshelev, 2020), is tackled by integrating growth and deferral options into a parallel compound option. Consequently, the purchase price should be subtracted from the values at the final nodes (V, W, X, Y, Z, AA, and AB) of the dependent binomial lattice, as illustrated in Figure 4.

By integrating growth and deferral options into a parallel compound option, this method has provided a comprehensive and equitable valuation of the synergies generated from the USD $51.54 billion acquisition. Therefore, the computations justified the first and second theoretical propositions by demonstrating that parallel compound real options can be applied in international business studies to provide a fair value of collaborative synergies when MNCs acquire a foreign affiliate pursuing sustainable practice. This also addresses the research questions and justified theoretical propositions.

On June 8, 2024, the market capitalization of the L’Oréal group was USD 263.06 billion (CompaniesMarketcap.com, 2025). When compared to the projected theoretical market value of L’Oréal post-acquisition of Aesop, which was USD $280.32 billion (i.e., $228.78 billion-plus USD $51.54 billion), it is evident that the anticipated outcome was not fully achieved. This shortfall can be attributed to several factors, including a decline in demand for beauty products in China in 2024, China’s economic downturn affecting consumer spending, and the luxury sector, which depends on discretionary spending, being significantly impacted (Patton, 2024).

The research does, however, also highlight the limitations of using real options to gauge the collaborative synergy of acquisitions of businesses. When multiple acquisitions or investments occur in anticipation of the time of generating synergies of one concrete deal, it becomes challenging to justify the synergistic effect of a single isolated purchase agreement using real market capitalization. For instance, in 2023, L’Oréal made five significant investments in the technology sector. L’Oréal also acquired Lactobio, a Danish probiotics biotechnology firm, and Debut, an American biotechnology company. Furthermore, L’Oréal invested in the artificial intelligence startup Rembrand (CHAILEEDO, 2024). Yet, despite this limitation, the theoretical contribution and managerial implication of the paper are discussed in the next section.

5. Findings and Discussion

Multinational corporations (MNCs) like L’Oréal proactively respond to external sustainability pressures by closely monitoring global trends, regulatory changes, and consumer expectations. Single case studies can offer in-depth analysis, contextual understanding, theory development, illustrative examples, and flexibility, and are particularly useful for exploratory research.

In this vein, this paper addresses two research questions, contributing to the understanding of sustainability and the application of real options in strategic practices. By acquiring Aesop, L’Oréal not only expanded its portfolio and generated reciprocal collaborative synergies through the exercise of parallel compound real options, but also reinforced its reputation as a leader in ethical and sustainable practices (Guilbault, 2023).

This paper answers the question: What is the role of MNCs in promoting sustainable practices, and how do MNCs transfer sustainable practices from an acquirer to a target in M&A deals? In L’Oréal’s case, the company can leverage its global research and innovation capabilities to implement Aesop’s sustainable practices across its other brands (Weil, 2023). This involves sharing best practices, such as sustainable sourcing and production methods, and adapting them to different markets like China. Additionally, L’Oréal’s extensive network of research centers and dedicated teams can help ensure that these practices are effectively implemented and monitored globally (L’Oréal Group, 2023).

Regarding the first research question, there is a subtle difference between the sequential compound option and the parallel compound option used in this case study, despite their apparent similarity. The difference is in how the option is presented (Kodukula & Papudesu, 2006). To benefit from the successor option (collaborative synergies) in any M&A scenario, the predecessor option (the acquisition) must be exercised.

However, for L’Oréal, there is a parallel compound choice since both the expansion option and the deferral option are available simultaneously, and one must be executed (buying Aesop) before the other is engaged (generating synergies).

In conclusion, the acquisition of Aesop by L’Oréal is a strategic move that leverages M&A to create collaborative synergies, exercise two real options for growth and deferral in parallel and strengthen their sustainability efforts. This cohesive approach positions both brands for long-term success in the competitive luxury beauty market.

6. Conclusions, Limitations, and Future Works

Real options theory offers a framework for evaluating investment opportunities under uncertainty. In this context, L’Oréal’s acquisition of Aesop can be viewed through two types of real options. The Growth Option involves entering new markets and expanding Aesop’s product lines. With L’Oréal’s support, Aesop can accelerate its growth in regions where it has a nascent presence, such as China. The Deferral Option allows L’Oréal to defer certain strategic initiatives until the synergies between L’Oréal and Aesop are fully realized, enabling better risk management and resource allocation.

6.1. Theoretical and Managerial Contributions

This paper contributes to strategic management, international business, and financial management. Theoretical and managerial contributions were made by investigating the application of parallel compound options in international transactions for assessing collaborative synergy. This new methodological approach to parallel compound real option valuation in M&A deals provides a more accurate estimation of collaborative synergies and their value, which is the main theoretical and practical contribution of this paper.

Varma (2011) argued that researchers have not used alternative methods to cross-validate their findings. If used appropriately, all techniques should produce contemporaneous results. This study empirically addresses this practical request by applying the Black–Scholes Options Pricing Model (BSOPM) and the Binomial Option Pricing Model (BOPM), which provided identical valuation results.

Miller and Arikan (2004) argued that real options valuation requires hyperrationality assumptions and capabilities that managers may not possess, making their practical use potentially untenable. However, this paper demonstrates that the necessary data (five or six variables) for BSOPM and BOPM are widely available for forward-looking calculations of investment valuations. Further research on this topic can aim to cross-validate different methodologies for valuing real options and uncover any anomalies in the results.

The paper provides new insights into the role of real options in enhancing collaborative synergies and promoting sustainable practices. The proposed methodology in Section 3.2 is only briefly outlined. The use of the J indicator (Capelli et al., 2024) considers the correlation between the ESG scores of an acquirer and a target. This indicator presents an interesting avenue for future research on the impact of ESG scores of collaborative partners on sustainability-based synergies, with the application of real option valuation.

6.2. Practical and Social Implication for Policy Measures for Regulators, Companies or Investors

Regulators can implement standardized ESG reporting frameworks to ensure consistency and comparability across companies. This will help us in accurately assessing the ESG performance of potential M&A targets. To incentivize sustainable investments, the institutions can provide tax incentives or subsidies for companies that engage in M&A activities aimed at enhancing sustainability and achieving SDGs. It can enforce transparency in reporting the impact of M&A activities on sustainability and ESG metrics, ensuring that stakeholders are well-informed about that environmental, social, and governance factors are thoroughly evaluated.

Investors can consider ESG performance as a critical factor in investment decisions, prioritizing companies that demonstrate strong sustainability practices and potential for long-term value creation. Active engagement with portfolio companies can encourage the adoption of sustainable practices and the integration of ESG factors into their business models. Having supported green M&A, investors can allocate capital, thus, enhance sustainability and recognizing the long-term benefits of such investments.

Companies can embed ESG considerations into the core business strategy and M&A decision-making processes to align with long-term sustainability goals. The senior management of the companies can adopt real options frameworks to evaluate the strategic flexibility and potential synergies in M&A deals, particularly those involving sustainability initiatives. Investment in building dynamic capabilities to assess and manage ESG risks and opportunities can include training for employees and developing specialized teams.

Therefore, the focus on creating collaborative synergies through M&A by integrating sustainable practices can leverage the competitive advantage of both acquirer and target companies. These policy measures can help create a more sustainable and resilient business environment, fostering long-term value creation and promoting the integration of ESG factors in M&A activities.

6.3. Limitations of Research and Future Work

Chintakananda et al. (2024) argue that the use of real options has limitations. Critics claim that real options oversimplify complex management processes (Driouchi & Bennett, 2012). Real-world decisions are often more complex than growth versus deferral, or switching and abandonment (Trigeorgis & Reuer, 2017). Additionally, the degree to which real options resemble their financial counterparts has been debated.

Some argue for stricter criteria for the valuation of exercising and abandoning options, like financial options (Adner & Levinthal, 2004), while others view options as a metaphor for strategic actions (McGrath et al., 2004). The author encourages future studies to extend the application of compound parallel options in IB research to examine this study’s generalizability.

The proposed methodology in Section 3.2 cannot be applied to companies without an ESG score; future research could address this gap. Additionally, the relationship between ESG practices and firm value is influenced by institutional norms, cultural context, and regulatory environments.

7. Final Thoughts

Combining growth and deferral options in a compound parallel option, while feasible in theory and applicable in IB research, requires careful consideration of institutional and cultural factors, as well as nationalist sentiments that manifest in daily actions, languages, and decisions (e.g., Hjerm & Schnabel, 2010).

Management research indicates that nationalist sentiments may deter collaborations with foreign partners (e.g., Ertug et al., 2024), and consequently, collaborative synergies. Kosterman and Feshbach (1989) conceptualize nationalist sentiments as “a perception of national superiority and an orientation toward national dominance [that] consistently implies downward comparisons of other nations”.

This formulation helps scholars differentiate nationalist sentiments from the economic and political components of nationalism that have gained significant attention in IB (Edman et al., 2024). While nationalist sentiments may have little effect on the beauty industry, they can be significant managerial and organizational variables in M&A transactions that prevent collaborative synergies in other business areas. This presents an intriguing field for future research in the IB topic in question.