One financial goal of financial managers is to maximize the shareholders’ wealth. Therefore, merger and acquisition decisions should be consistent with shareholder wealth maximization, and financial characteristics of the targets to consider in the decision-making process. The net present value method is one of the useful methods that help financial managers to maximize shareholders’ wealth. The capital budgeting decision mergers Acquisitions Net Present Value Financial managers are working for the shareholders and their primary goal is profit maximization in order to maximize the wealth of the company and the shareholders.
The Capital budgeting decision focuses on the net present value method, the payback period, and the internal rate of return method. This paper has two parts, where the first aspect relates to the capital budgeting decision. This paper will recommend if Goggle should accept a new project by using the net present value method. Next, the paper will discuss Google’s potential acquisition of Groupon and if it will add value to the shareholders of both corporations. Finally, this paper will make a recommendation to Goggle and Groupon on the best course of action for a merger or acquisition.
Part I First, a financial manger has to make optimal decisions they will benefit the company. A financial manger has to know how to make money and smart investments in order to raise capital and put the money back into the company. The net present value is an important concept and useful tool to use to help financial managers make informed financial decisions. For instance, the net present value concept works with the capital budgeting decision to make an informed decision on a project and the potential for profits.
In addition, net present value compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account because dollar today is worth more than a dollar in the future. The time value of money concept takes into considerations that money has a different buying power in the future because of inflation and changes in interest rates. For example, if the net present value of a project is positive, then the company should accept the project, but if the net present value of the project is negative then the company should not accept the project.
Calculations 1) Calculate present value (PV) of cash inflow (CF) Initial Cash Outflow PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5 PV of CF= $1,750,000 (1+ 2) Calculate NPV NPV = Total PV of CF – Initial cash outflow -Initial cash outflow + Total PV of CF r = Discount rate (14%) Part II Rumors about potential mergers and acquisitions are often a hot topic in the business press. Mergers and acquisitions can have advantages and disadvantages for a company because it has both rewards and risks.
Companies want to have successful and profitable mergers that would have value to their shareholders. “One of the most common motives for mergers is growth. There are two broad ways a firm can grow. The first is through internal growth. This can be slow and ineffective if a firm is seeking to take advantage of a window of opportunity in which it has a short-term advantage over competitors. The faster alternative is to merge and acquire the necessary resources to achieve competitive goals” ( Google’s potential acquisition of Groupon would add value to the shareholders of both corporations, especially Groupon.
The recent price per share for Google is $1,130. 18 and the recent price per share for Groupon is $11. 56. The Groupon company was a new company that made over one billion dollars in sale their first year in business. In 2010, when Groupon first started it was a new idea and a new site that offered daily deals. Google wanted to buy Groupon for six billion dollars but the deal “the daily-deals site that became the quickest firm to rack up $1 billion in sales and the second-quickest, behind video behemoth YouTube, to hit a $1 billion valuation.
Online acquisitions didn’t get any bigger than this” (Sennett, 2012). The impact on Google shareholders would be a negative impact on their stock. For example, “there is also a perception in the market that Google would not acquire Groupon as it will have a negative impact on Google’s stock. This might be true for the shorter-term but not for the longer-term period as Groupon grows and delivers better performance” (Seeking Alpha, 2012). In addition, if Google was to acquire Groupon then Google will face tax losses.
The impact on Groupon shareholders would add value to the company because Google would back it and the company could come up with more innovative ways to keep and attract new customers. The business concept for Groupon could lead to duplications by other businesses. Groupon stock would increase and the company could have made millions of dollars off a merger with Google, since Google is already a profitable company. The financial conditions of both corporations prior to the merger were outstanding. For example, Groupon had an annual revenue of more than $500 million and the company was estimated at $1.
4 billion. On the other hand, Google was already a successful company with shares of over $600. “Google Investors, however, seemed focused on Groupon’s valuation, which was estimated at 1. 4 billion during its last fund-raising round in April. Shares in Google fell 4. 5 percent, to $555. 71; the stock was battered by news that European regulators had opened an antitrust investigation” (Rusli, Worthham, 2010). Google and the Groupon Company would be more profitable if they remain separate companies because Google was already very successful. For instance, Groupon business model could be easily copied.
In addition, Groupon expanded to fast, and their stock sold for over $20 then dropped to $13 in less than a year. For example, the leaders at Grouon wanted to grow the company as fast as possible, and then cash out on the company. “This was an outrageous offer for a company that had reported just $30 million in revenue for all of 2009, and any ordinary startup would have taken it. But Groupon’s growth in 2010 was off the charts, and bankers from Morgan Stanley and Goldman Sachs were salivating at the prospect of leading its public offering.
Goldman chief Lloyd Blankfein made the trip to Chicago personally to woo Groupon. “The bankers broke out all these charts,” said a source familiar with the meetings. “They showed Eric a growth matrix that projected Groupon would be worth $25 billion in a few years. When he saw that, Google was toast” (Popper, 2013). Finally, a merger between Groupon and Google could take years because of the antitrust laws. An acquisition is successful when the company has a clear plan with specific objectives and a timeline to complete the deal.
In addition, successful acquisitions also include a way to finance the acquisition whether it is equity financing, cash reserves, or debt financing. A merger is successful when there is effective communication, effective leadership, and clear objectives and planning. In addition, successful mergers also involves the elimination of power struggles and Potential pitfalls – might the combined entity actually be less profitable than either company operating independently? What are the risk factors with this potential acquisition?
Explain and discuss financing options for financing mergers and acquisitions “Even though bidding firms will pay a premium to acquire resources through mergers, this total cost is not necessarily more expensive than internal growth, in which the firm has to incur all of the costs that the normal trial and error process may impose. While there are exceptions, in the vast majority of cases growth through mergers and acquisitions is significantly faster than through internal means” Apply principles of risk and valuation analysis to mergers and acquisitions