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NET PRESENT VALUES, ACQUISITIONS AND MERGERS

One of financial goals of the financial managers is to maximize the shareholders’ wealth. Therefore, merger and acquisition decisions should be consistent with shareholder wealth maximization criteria and financial characteristics of the targets should be considered in the decision process. The NPV method is one of the useful methods that help financial managers to maximize shareholders’ wealth.

Module 5 Case Assignment 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.

Case Assignment
Part I:

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 to maximize shareholders’ wealth by making better capital budgeting decisions.
Suppose Google (http://finance.yahoo.com/q?s=goog&ql=1) is considering a new project that will cost \$2,425,000 (initial cash outflow). The company has provided the following cash flow figures to you:

Year Cash Flow
0 -\$2,425,000
1 450,000
2 639,000
3 700,000
4 550,000
5 1,850,000
If Google's cost of capital (discount rate) is 11%, 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 Google? Should the project be accepted? The shareholders of Google 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
or
-Initial cash outflow + Total PV of CF
r = Discount rate (11%)
If you do not know how to use a calculator for these calculations, please use the present value tables.
Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. The McGraw−Hill. Retrieved May 2012 from http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf

Rumors that Google is Considering Acquiring Groupon
Rumors about potential mergers and acquisitions are often a hot topic in the business press. There are rumors that Google is considering acquiring Groupon (http://finance.yahoo.com/q?s=GRPN&ql=0).
As you know from reading the material in the background materials, mergers and acquisitions can potentially bring about great rewards but also can potentially bring great risks and pitfalls. For this assignment, do some research concerning the arguments both for and against such an acquisition 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 acquisition. Instead you are considering this from the point of view of whether or not such an acquisition would be a profitable undertaking that would add value to the shareholders of two corporations (Google and Groupon).
The following article provides information on Google's potential acquisition of Groupon:
Lachapelle, T. (2012). Buying groupon hard for anyone as growth slows: real m&a. Retrieved December, 2012 from http://www.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw
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 acquisition. Then write a five to seven pages report for the shareholders of Google and Groupon by answering the following questions and the questions in part I:
1) Do you think Google's potential acquistion of Groupon would add value to the shareholders of both corporations? Why or why not?
2) Based on your analysis and findings (Part I and Part II), what would you recommend to the shareholders of Google and Groupon? Please explain your reasoning.
The main focus of this assignment will be answering the questions above and the questions in part I.
• The impact on Google shareholders
• The impact on Groupon shareholders
• The financial conditions of both corporations (do not forget to consider the new project proposed by Google in part I)
• Why might one combined Google/Groupon company be more profitable than if they remained separate companies? In general, what makes an acquisition successful?
• Potential pitfalls - might the combined entity actually be less profitable than either company operating independently? What are the risk factors with this potential acquisition?
In addition to making use of concepts from the background materials for this module, feel free to use concepts from Modules 1-4 as well.
NOTE: Please note that your report/assignment will not be accepted without proper citations and references. You must use the sources from the background material together with the sources you find your own. It is also REQUIRED that you answer all the questions related to learning outcomes.

#### Solution Preview

Part II: Mergers and Acquisitions:
1) Do you think Google's potential acquisition of Groupon would add value to the shareholders of both corporations? Why or why not?
Underlying potential for Google was that it would help the overall stock prices rise and would allow the company to meet the mark of \$ 1000 at a much faster pace. The company is also known to be a well-established one; hence with the new acquisition the company will be able to use the existing company to improve its overall growth and will also help in enhancing the overall market position. Google is also clearly an extremely large company with a huge potential in the markets (Dayton Business Journal, 2010).
In the case of Groupon, the shareholders would have gained millions if not billions of dollars from the overall Google take over. Here the company stood to gain an increase and would have expected to increase the overall stock price by almost 100% (Hachman, 2010). This along with the increase in the overall share prices of Google would both allow the intense share price increase to improve.
The two companies have shown major changes in their performance in the past year. Google went on to include a new product to their product line, i.e. Google Offers and this was a direct competition for Groupon. The stock prices of the company have clearly increased as well. However in the case of Groupon the company clearly saw a major decline in the overall performance. Although the major ...

#### Solution Summary

The solution provides detailed discussion of potential acquisition of Groupon would add value to the shareholders of both corporations. Also, a set of recommendations have been developed based on the overall analysis of the companies.

\$2.19

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 to maximize shareholders' wealth by making better capital budgeting decisions.

Use various internet search engines such as news.google.com for the latest news on this acquisition.

1) Do you think Google's potential Acquisition of Groupon would add value to the shareholders of both corporations? Why or why not?