Share
Explore BrainMass

Recommendation to the shareholders of Google and Groupon

Google is considering a new project that will cost $1,750,000 (initial cash outflow).

Year Cash Flow
0 -$1,750,000
1 350,000
2 630,000
3 700,000
4 550,000
5 850,000

Google's cost of capital (discount rate) is 14%, and their net present value is $281,369.67.
Google is considering acquiring Groupon. Based on the above information, what would be the recommendation to the executives and the shareholders of Google? Would such an acquisition be a profitable undertaking that would add value to the shareholders of two corporations (Google and Groupon)? Should the project be accepted? The shareholders of Google would also like to know the meaning of NPV concept.

The report for the shareholders of Google and Groupon should include answers to the following questions:

1) Does Google's potential acquisition of Groupon add value to the shareholders of both corporations? Why or why not?

2) Based on the above information, what is a good recommendation to the shareholders of Google and Groupon? Please explain the reasoning behind the explanation.
Also, please include responses to the following issues:
a) The impact on Google shareholders
b) The impact on Groupon shareholders
c) The financial conditions of both corporations
d) Why might one combined Google/Groupon company be more profitable than if they remained separate companies? In general, what makes an acquisition successful?
e) Potential pitfalls - might the combined entity actually be less profitable than either company operating independently? What are the risk factors with this potential acquisition?

Solution Preview

1) Does Google's potential acquisition of Groupon add value to the shareholders of both corporations? Why or why not?
NPV refers to the Net present value and it provides the value addition done by the project. NPV can be calculated by following formula: Present value of future cash flows- Initial Investment. If NPV is positive then it adds value to the project, hence it is acceptable to the organization.
Thus Google's potential acquisition of Groupon will add value to the shareholders of both corporations. This is because Google will benefit in terms of incremental value addition of $281,369.67. Google's shareholder's wealth will enhance by this value.
Groupon shareholder's value will also be enhanced as it will get returns of around 14%.
2) Based on the above ...

Solution Summary

Solution helps in providing recommendation to the shareholders of Google and Groupon

$2.19