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Net Present Value, Mergers, and Acquisitions

Rumors about potential mergers and acquisitions are often a hot topic in the business press and there have been rumors that Google is considering acquiring Groupon.

As you know, 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. Consider 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).

Please assist by answering the following questions:

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, what would you recommend to the shareholders of Google and Groupon? Please explain your reasoning.

In your answers to the primary questions, please respond to following issues:

- 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?

________________________

- Describe and apply net present value (NPV) method to make capital budgeting decisions

- Identify success factors in mergers and acquisitions

- Explain and discuss financing options for financing mergers and acquisitions

- Apply principles of risk and valuation analysis to mergers and acquisitions

Solution Preview

I am providing information on the full case, including the questions relative to the net present value portion of the required info. In addition, I am attaching a couple of articles outlining the position of financial analysts regarding the potential merger/acquisition by Google of Groupon. Recognize that this occurred in the early months of 2012, and the deal was not consummated. Instead, Google proceeded with its own version called "Google Offers", which has met little traction in the market thus far.

Also, Groupon suffered a loss in sales in 2012, as well as increased expenses, a loss of $.12 per share in earnings, and the CEO was fired within the last month. While they are considered to have great potential, we need to understand that with this high potential there exists very high risk for the future operation of this firm.

I'll let you review the attached information. Thank you for using our service.

Now, on to the case of Google/Groupon:

Google, as we know, is a phenomenon in the information technology sector, which went public about 8 years ago. Today their stock price exceeds $800, and appears to be gaining traction for more growth (the forecast is that this will be a $1000/share price in the near future).

In early 2011, Google made an offer to purchase Groupon for $3 - $4 billion. This was quickly rejected by Groupon. Google countered with an offer of $5.3 billion, plus performance incentives of an additional $700 million, equalling $6 billion. Again, Groupon declined this offer.

Groupon is considered a technology company which provides "daily deals" for consumers in over 44 countries; with a consumer base exceeding 40 million; and with a gain of new consumers of 4 million over the past month, Groupon has provided a basis for consumers to gain entry to new businesses through offering promotional discounts. It is telling that for 2012, Groupon had a net loss of $.12 per share; sales goals were not met; and stock price has been stalled in the range of $4.75 - $5.50.

As a result, the CEO of Groupon was fired (with a very lucrative exit financial package).

Now to why the offer from Google was declined. The Board of Directors of Groupon decided that the potential for an antitrust action was so great that it made the deal not worth pursuing, even though Groupon as a firm stood to increase their wealth by billions of dollars. So fear was the motivating factor for not agreeing with a merger/acquisition by Google.

For their part, Google was excited to acquire Groupon for the ability to tap into the potential for local advertising which they were not capturing ...

Solution Summary

This case details the information dealing with a failed merger/acquisition between Google and Groupon, providing the insight and details surrounding the offer, as well as the reasons why a deal was not formed. IT ALSO PROVIDES INSIGHT INTO FINANCIAL IMPACTS OF MERGERS/ACQUISITIONS and the accompanying effects on the firm.

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