For many tech companies, the value of the real options created by their investment in IT is often much greater than the value of the tangible and intangible assets that they acquire immediately on making the investment. The challenge for the investor is to identify such real option opportunities, assess the downstream probabilities of encountering each opportunity, and evaluate the expected future cash flows for the optimal decisions regarding each available option.

Strategic Analysis:
Investments in IT are quite unlike investments in manufacturing technology. Manufacturing machinery makes products which when sold generate revenues and profits. IT, on the other hand, creates information or makes information available in a convenient form to managers and other employees who make decisions. Thus, IT does not in itself generate revenues or profits. The IT based strategy must get communicated throughout the organisation. The organisation must adapt and learn to make creative use of the information provided by the new IT to generate a competitive advantage before the IT can enhance profits. As a result, there will likely be a lag before the investment in IT starts generating positive cash flows. In addition, because of the lag, the impact of the IT investment may be attenuated by the counter-actions of the competitors even before it shows up in the financial performance. The investor must therefore understand the strategic role of IT

and its lagged impact to capture its value enhancing potential.
In summary, corporations around the globe are increasing investments in IT, many equity funds are proposing tech acquisition or buy-out deals and several tech companies are enjoying significant appreciation in their valuations today, but the task of valuing the IT investments and acquisitions remains very difficult. IT investments do not directly result in a positive impact on cash flows, IT based strategy needs to be implemented successfully to generate sustainable benefits from IT. Valuation of tech investments is further complicated by the fact that much of the value created is in the form of intangible assets or real options rather than the tangible assets in the manufacturing sector. An investor with a prior background in the tech sector has an edge to the extent it provides a clearer understanding of potential technology based advantages and related opportunities and threats. But, to convert that edge into a real advantage, the investor must also understand the business and financial implications of the technology choices.

References:
Anderson, M., R Banker and S Ravindran, “Value Implications of Investments in Information Technology,” Management Science, 2006.

Currier, C., “The Surprising Tech Revival,” E-Commerce Times, Bloomberg News, November 25, 2006.