What is Net Present Value (NPV)
NPV = Total PV of CF – Initial cash outflow
Where total PV of cash flow is defined by
PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5. CFn/ (1+r)^n
Net present value helps in comparing a dollar today with a dollar in the future. It can do so by discounting the future dollar by adjusting for inflation (Rouse, 2011). Companies use this method to see the financial viability of a project against its financial target.
In the problem, the cash flow is indicated in the first row of the table above. Google has set a discounting rate of 14% for the project. This means that if the project cannot provide cash flow at a rate of at least 14% in future from the initial investment then Google will not go ahead with the project. Present Value factor in the table is calculated using the formula 1/ (1+0.14)^n where ‘n’ means ‘year’. By multiplying the cash flow with the present value factor, we acquire the present value of the individual cash flows. Upon summing up all the cash flows we get the Net Present Value (NPV) of the project discounted at 14%.
Net Present Value of the project is = $281,370. The value is positive. It means that the Google management can go ahead in their investment plan for the project with expected positive returns from the venture.
Groupon Google Merger: Analysis
Groupon which came into business in 2008 and became a star overnight was on the way to become the fastest to billion dollars till 2010 but after then the company started performing in a way not expected by the market. In 2010 the company was valued at more than $1 billion. Since then the stock price of the company plummeted. From a price of $25 in Nov, 2011 the stock price plummeted at $2.93 in December, 2012. Groupon’s current stock price is $11.41 (Yahoo Finance). The stock price is still undervalued given the business model and the growth opportunity in the business segment. Before Groupon went ahead with its IPO it was rumored that Google wanted to buy Groupon for an estimated price of $6 billion. However, at that time the Groupon management internally calculated the valuation of the company and said that Groupon is valued at $16 billion. However, things didn’t go well with Groupon after that. The CEO who was the founder of the company is now no longer with the organization and the company has seen one of worst stock devaluation among all tech stocks after its IPO. Groupon in last one year is on a shopping spree and has acquired more than 20 companies across the world to expand its business. With the revenue still not growing from the online business, Groupon is not making money.
Let’s now look at the financial position of Groupon. It has a cash of around $1.18 billion on its balance sheet. It also has almost $800 million of net account payable which it needs to pay to its short term creditors (Yahoo Finance). This leaves approximately $400 million cash in hand for the company after paying all its liabilities. Furthermore, Groupon has huge accumulated tax losses of about $600 million in its balance sheet which can benefit anyone who would acquire the company.
Groupon is the biggest player in the daily deals market. It has acquired Mertado which will give Groupon access to social shopping business through Facebook. It has bought companies in India, Malaysia and European countries to expand its daily deal business. Groupon acquired Breadcrumb and a POS system to target local restaurants and deals. It also has acquired Savored which gives Groupon access to high end restaurants. Groupon also acquired Blink, a last minute hotel deal company in Europe and Glassmap, a real time location sharing application (Novellino, 2012). It seems that under the new leadership Groupon is trying hard to bounce back by acquiring companies across the globe. However, the results are still not showing in its income statement and investors are still not bullish about the company. It makes Groupon still a very lucrative undervalued company ready for acquisition.
Google currently has presence in almost all kinds of business in the internet space. It dominates the search engine, explorer, email, blogging and mobile software domains. It already has the basic infrastructure to launch any new internet based product and reach millions of customer. Google understood that well back in 2010 when it offered a $6 billion deal to Groupon (Lachapelle, 2012). Google is rumored to have offered another deal to Groupon in 2012.
Groupon-Google Merger: Risks and Pitfalls
As we have seen above that if Google offers a price of $1.75 billion to purchase Groupon, then it will earn a profit from the investment within 5 years. At the current valuation of Groupon, cash flows expected by Google after merger seems optimistic. If the synergies between the strengths of Google and Groupon can be achieved then the cash flow predictions also seems achievable. Google believes that it will be able to reach a far bigger customer base than Groupon after merger and that will automatically improve the revenue and which will in turn improve the cash flow and net profit. If Google can buy Groupon for a price of $1.75 billion then Google shareholders should not be worried about the deal.
Net present value is a technique used by companies to analyze the financial viability of a project. This is a capital budgeting tool to compare projects for choosing better investment options. Google is planning to acquire Groupon for a long time now. Groupon resisted the offers from Google assuming that it will be able to grow at a very fast rate on its own and will be able to beat the competition. This never happened and Groupon after staring well as a company stumbled since 2011. The stock of the company is doing poorly because of the bad financial results the company is posting in recent quarters. It is trying hard to come out of its poor performance by acquiring a number of small companies around the world. Still the company results are not as per expectation. This makes Groupon a good candidate for takeover. Google currently does not operate into the online deal business. However, it has hundreds of millions of customer base which are potential consumers of different types of online deals. If it acquires Groupon, immediately it can use its huge customer base to grab the market of daily deals. Furthermore, as Google has a very sophisticated search algorithm it can market the deals to a right customer segment which Groupon is unable to do. Since Google can begin to earn profit almost immediately after the deal, it should go ahead to acquire Groupon at the right price.
Lachapelle, Tara (2012). Buying Groupon Hard for Anyone as growth Slows: Real M&A. Bloomberg. Retrieved on 16th October 2013 from <http://www.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw>
Rouse, Margaret (2011). Net Present Value (NPV). Whatis.com. Retrieved on 16th October 2013 from < http://whatis.techtarget.com/definition/Net-present-value-NPV>
Novellino, Teresa (2012). Groupon: The Acquisition King of 2012. Upstart Business Journal. Retrieved on 16th October 2013 from < http://upstart.bizjournals.com/money/loot/2012/10/01/groupons-acquisitions-led-in-2012.html?page=all>
Groupon Inc., Balance Sheet. Yahoo Finance. Retrieved on 16th October 2013 from < http://finance.yahoo.com/q/bs?s=GRPN+Balance+Sheet&annual>