Net Present Value Mergers and Acquisitions A-Level Coursework

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Business -- Corporate Finance - Net Present Value - Mergers & Acquisitions, Parts 1 &

Google, Inc. is analyzing the possible added value of a project initially costing $1,750,000.00 Calculating the net cash flows for 5 years, the 15% cost of capital, the present value of cash flow for 5 years and the net present value all allow the reviewer to determine the added value that might encourage the company to pursue this project. Even as Google, Inc. is advised to pursue this project, its shareholders are advised against the acquisition of Groupon, as the downsides and risks considerably outweigh the possible advantages of acquisition. In contrast, Groupon shareholders should seek the acquisition based on the balance of advantages and disadvantages that such an acquisition would pose for them.

B. Body

Capital Budgeting Decision for Google Shareholders and Executives.

I recommend that the executives and shareholders of Google pursue the new project. The advisability of pursuing the project will rest in part on whether it would add value to the shareholders. In order to determine whether value would be added, we must determine the proposed acquisition's annual present value of cash inflow for the projected period of 5 years, totaling the net present value, as the Net Present Value is the difference between the total present value of annual cash inflows and the total present value of annual cash outflows for the anticipated 5-year period. These figures have been calculated in my following table:

Year

Net Cash Inflow

Present value of $1 at 14% (Brealey, Myers, & Allen, 2005)

Present value of cash inflow

1

$350,000.00

.877

$306,950.00

2

$630,000.00

.769

$484,470.00

3

$700,000.00

.675

$472,500.00

4

$550,000.00

.592

$325,600.00

5

$850,000.00

.519

$441,150.00

Net Present Value $2,030,670.00

Narratively, the process is explained as follows. Google's net cash flow is: year 1 = $350,000.00; year 2 = $630,000.00; year 3 = $700,000.00; year 4 = $550,000.00; and year 5 = $850,000.00. Google's cost of capital is 14%, resulting in figures of: year 1 = .877; year 2 = .769; year 3 = .675; year 4 = .592; and year 5 = .519. To arrive at the present net value for each year, we multiply each year's net cash flow by its present value of 14%, resulting in: year 1 = $306,950.00; year 2 = $484,470.00; year 3 = $472,500.00; year 4 = $325,600.00; and year 5 = $441,150.00. The total of those present net values for each year is $2,030,670.00.

After determining present net value, the added value is determined. Since the new project will cost $1,750,000.00 in initial cash outflow, that figure is subtracted from the net present value to determine whether and to what extent the project would add value to stockholders. The present net value ($2,030,670.00) minus the initial cash flow ($1,750,000.00) means added value of $280,670.00, which makes the proposed project desirable to stockholders and management.

2) Part 2 -- Recommendations to the Shareholders of Google and Groupon

After reviewing the financial aspects and other resources of both companies, I would recommend against the acquisition for Google shareholders but for the acquisition by Groupon shareholders. Google shareholders have potentially little to gain and more to lose. Positively, acquisition of Groupon would mean: gains of Google's market share, efficiency and synergy in the daily online coupon business (Gaughan, Mergers, aquisitions and corporate restructurings, 2011, pp. 132-4), as Groupon already has a following and value in its core daily business (Lachapelle, 2012); a possible all-cash purchase of the considerably smaller Groupon with no share of Google stock with Groupon shareholders (McClure, Mergers and acquisitions: Definition, 2009); acquisition of the considerably smaller Groupon will allow Google to make a relatively simple cash or cash/stock acquisition while continuing to carry out its day-to-day business (McClure, Mergers and acquisitions: Why they can fail, 2009); Groupon has already shown a glimmer of viable competition with the online retailer, Amazon, and Google might be able to develop that glimmer into a lucrative inroad in online retail sales (Lachapelle, 2012). Consequently, the possible gains from acquiring Groupon cannot be denied.

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Despite these anticipated gains, Google faces considerable "downsides" and risks by acquiring Groupon. Groupon will probably be purchased at a premium of $3 - $6 billion, even as Groupon's market share and value are sinking (Yahoo! Finance, 2013). Another downside would be the considerable "customer fatigue," as the enticement of daily online deals is already noticeably wearing off for consumers (Lachapelle, 2012). Furthermore, there is considerable risk that their two separate corporate cultures will not allow Google to readily absorb Groupon (McClure, Mergers and acquisitions: Why they can fail, 2009). Another downside is that Google is already deeply leveraged for other current projects, with a considerable negative cash flow of -$13,056,000,000.00 (Yahoo! Finance, 2013). Furthermore, I am already advising it to pursue the project in Part 1 due to its anticipated added value of $280,670.00. The additional cash or cash/stock outlay for Groupon is $3 - $6 billion (Lachapelle, 2012), which will contribute considerably to Google's negative cash flow from investing activities. Finally, Google has already made inroad into the market by pursuing its own coupon business and, under the above circumstances, would probably find it less expensive and more profitable than purchasing Groupon (Lachapelle, 2012). Therefore, Google's shareholders should militate against management's possible debilitating hubris in attempting a Groupon acquisition (Brealey, Myers, & Allen, 2005, p. 156), and should strongly oppose the acquisition.

In stark contrast to my advice to Google shareholders, I would advise Groupon shareholders to seek their company's acquisition by Google. While it is true that Groupon has shown some possibilities in competition with Amazon for online sales, overall the company's value continues to fall (Yahoo! Finance, 2013). There is the distinct likelihood that Groupon will not survive without acquisition (Lachapelle, 2012) and the acquisition will create a more competitive, cost efficient company (McClure, Mergers and acquisitions: Definition, 2009). On the downside: Groupon shareholders will receive no exchange of stock or consolidation as a new company (McClure, Mergers and acquisitions: Definition, 2009); the entire company will apparently be purchased by cash or cash/stock, will essentially consist of solely cash/stock of $3 - $6 billion and total liabilities - currently $1,287,434 (Yahoo! Finance, 2013) -- and will essentially consist of a "shell" company (McClure, Mergers and acquisitions: Definition, 2009). Nevertheless, considering Groupon's continuing decreasing value (Yahoo! Finance, 2013), consumer fatigue and shrinking market share due to fierce competition from other companies (including Google) (Lachapelle, 2012), I believe Groupon's shareholders would benefit the most by pursuing their company's acquisition by Google.

3) Module 5 Assessment

Module 5 has been the most enjoyable and understandable module thus far. First the calculation and application of net present value is perfectly and easily logical throughout. Secondly, perhaps due to news articles about mergers and acquisitions over the past decades, the success/failure factors of mergers and acquisitions are readily understandable business concepts. Furthermore, the relatively simple distinction between the merger of two companies to make a third company vs. one company's takeover of another company by acquisition, along with their straightforward financing options, are quite logical concepts. Finally, comparing the relative pros and cons on each side of a possible merger or acquisition was an interesting exercise. One can see how an acquisition or merger could be very advantageous for one side of the equation but a terrible idea for the other side. I found Module 5 to flow the most logically of all the modules to date.

C. Conclusion

Google, Inc. is a very large corporation that aggressively pursues investment opportunities and is currently evaluating a new project. This anticipated project, with an initial cash flow outlay of $1,750,000.00, has net cash flows of: year 1 = $350,000.00; year 2 = $630,000.00; year 3 = $700,000.00; year 4 = $550,000.00; and year 5 = $850,000.00. Google's cost of capital is 14%, resulting in figures of: year 1 = .877; year 2 = .769; year 3 = .675; year 4 = .592; and year 5 = .519. Multiplying each year's net cash flow by its present value of 14%, we.....

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