Net Present Value, Mergers, and Acquisitions
Module 5 Case has two parts. Part I of this case assignment is related to capital budgeting decision and Part II is about mergers and acquisitions. Please read both parts carefully before you start answering the questions.
Net Present Value (NPV) method is one of the most important methods which is used to make capital budgeting decisions by almost every company. NPV method is important because it helps financial managers maximize shareholders' wealth by making better capital budgeting decisions.
Suppose T-Mobile corporation is considering a new project that will cost $3,219,000 (initial cash outflow). The company has provided the following cash flow figures to you:
Year Cash Flow:
If the T-Mobile's cost of capital (discount rate) is 4%, what is the project's net present value? Based on your analysis and findings, what would you recommend to the executives and the shareholders of T-Mobile Corporation? Should the project be accepted? The shareholders of T-Mobile would also like to know the meaning of NPV concept.
You may use the following steps to calculate NPV:
1) Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5
2) Calculate NPV
NPV = Total PV of CF - Initial cash outflow
-Initial cash outflow + Total PV of CF
r = Discount rate (6%)
T-Mobile - Sprint Merger?
Rumors about potential mergers are often a hot topic in the business press. One rumor being floated around recently is a potential merger between mobile phone giants T-Mobile and Sprint. Mergers between two large companies are always complicated, but some have noted the possible synergies in 4G technologies that might be possible in such a merger.
As you know from reading the material in the background materials, mergers can bring about great rewards but also can bring great risks and pitfalls. For this assignment, do some research concerning the arguments both for and against such a merger from a financial perspective. For this module we are not so concerned with how consumers may fair, as this is an issue for the government to consider if they have to approve this merger. Instead you are considering this from the point of view of whether or not such a merger would be a profitable undertaking that would add value to the shareholders of both corporations.
There are different articles on this potential merger, but here is one link to get you started:
But do not limit yourself to this article. Use Proquest, EbscoWeb, and other sources in the Cyberlibrary. Use various internet search engines such as news.google.com for the latest news on this merger. Look at the web-pages for Yahoo and Microsoft. Then write a five pages report for the shareholders of Sprint and T-Mobile by answering the following questions and the questions in part I:
Do you think a merger between Sprint and T-Mobile would add value to the shareholders of both corporations?
Based on your analysis and findings (Part I and Part II), what would you recommend to the shareholders of both corporations? Should both companies merge? Please explain your reasoning.
The main focus of this assignment will be answering the questions above and the questions in part I.
In your answers to the primary questions in part II, consider the following issues:
1. The impact on T-Mobile shareholders
2. The impact on Sprint shareholders
3. The financial condition of both corporations (do not forget to consider the new project proposed by T-Mobile in part I)
4. Why might T-Mobile and Sprint combined as one company be more profitable than they would if they remain independent?
5. Potential pitfalls - might the combined entity actually be less profitable than either company operating independently?
See the attachment for net present value (NPV) mathematical solutions.
T-Mobileâ?" the American subsidiary of Deutsche Telekom AG (ETR:DTE)â?" acquiring Sprint Nextel Corporation (S) would add value to shareholders of both corporations. A horizontal deal of this size is also not unprecedentedâ?"in 1998, Exxon and Mobile, previously fierce competitors, completed a $77.2 billion merger, (Gaughan, 2001, p1.4). The merger would combine many benefits of each competitor under a single bannerâ?"providing the opportunity for both rapid growth, as well as various synergies.
RAPID GROWTH OPPORTUNITY
Rapid growth opportunity is the most intuitive benefit of the potential merger. Rather than slogging through internally generated growth on their own, a combined company offers immediate market-share growth for shareholders (Gaughan, 2001). For example, Sprint's US based fourth generation network (4G) claims 9% of the total market share, but 75% of the 4G customers (Churchill, 2010). Compare this to T-Mobile's 12% market share on its "3G+" capable network (Churchill, 2010 and Wolpin, 2010). Merging these two American market shares would result in the 3rd largest customer base behind Verizon and AT&T. Such a result would be worth a short-term cash investment from both sides of the merger's shareholders. Additionally, this considers only domestic market share. T-mobile is a subsidiary of the German giant Deutsche Telekom, which commands a massive presence in the European marketâ?" an immediate benefit to Sprint shareholders.
Synergy is really what attracts merger and acquisition projects. T-mobile and Sprint would be no exception. From marketing opportunities, network infrastructure upgrades and performance, as well as customer service, a T-mobile/Sprint merger would provide synergy based on cost economies, as well as revenue enhancement.
With the ultimate goal of lower cost per-unit, cost economy based synergy seeks to eliminate "duplicate cost factors such as redundant personnel and overhead," (Gaughan, 2001, p 1.5). The highest profile overhead for both network providers is their wireless network infrastructure. A race for network capacity, its subsequent speedâ?"and the resulting customer satisfactionâ?"will define profitability over the next 5-10 years. Globally, mobile data traffic increased 160 times over the course of 2010â?"and continues to grow 240% faster than wired connections (Hardesty, 2010). 4G technology is poised to capture a large share of customers as they ...
Uses a potential merger with Sprint and T-Mobile to illustrate the concept of net present value, discount rate, and cost of capital. Uses detailed formula to calculate net present value (NPV). 1,500 words. APA format with references.