NPV= A1/ (1+k)1 + A2/ (1+k)2 + A3/ (1+k)3 + An/ (1+k)n – C
Where; A- Annual cash flow
k- Cost of capital
C- Initial investment
n- Number of years
NPV= 450,000/ (1+0.11)1 + 639,000/ (1+0.11)2 + 700,000/ (1+0.11)3 + 550,000/ (1+0.11)4 + 1,850,000/ (1+0.11)5 – 2,425,000
= 450,000/1.1 +639,000/1.232 + 700,000/1.368 +550,000/1.518 + 1,850,000/1.685 - 2,425,000
NPV = 471,011.84
The NPV of the company is 471,011.84. Based on this analysis performed I would recommend the executives and shareholders of Google to undertake the given project since it profitable and viable. Hence the project should be accepted because the NPV>0. The positive NPV indicates that the project would be accruing capital gains to the company. Thus, the company executives would be able to increase the shareholders wealth which is much needed by the company owners. The NPV technique is an inexpensive cash flow method that is applied by financial managers in making capital budgeting decisions. The NPV method discounts cash inflows and cash outflows and determine the net present worth of an investment by subtracting discounted outflows from discounted inflows to attain the net present cash inflow or worth. This method involves the use of a rate or cost of finance that is desired by the management of the company to discount cash inflows and cash outflows (Paramasivan, & Subramanian, 2001). According to the NPV method, if the consequential NPV is positive the corporation is advised to invest in that particular project.
However, if the NPV of the given project is negative the management does not invest on the given project. Consequently, if the NPV obtained is equal to zero the management would be indifferent with the project since the project does not add nor lose worth for the company. A project of that type does not bring in any monetary value for the company and thus, the management would be indifferent on whether to accept. The concept of NPV is widely used by finance executives due to the benefits that it accrues to the capital budgeting decision making process. To begin with, the NPV method distinguishes the time value of money and hence, it realizes that dollar now is more precious than a dollar tomorrow. Thus, the two values can only be compared in their present values. Secondly, the method is realistic since it analyzes the total inflows of the project which determine the project’s profitability. Thirdly, the NPV method is consistent with the company’s primary goal of maximizing the shareholders wealth because a positive net present value would increase the shareholders value in the company.
Google had made its bid to acquire the online coupon service company in 2010 when the company was valued at $6 billion. However, Groupon decided to forego Google’s offer and in return the company went public in 2011. Consequently, after Groupon went public, the company has been recording a downward movement in its overall performance. This has seen the company sinking by a whopping 79% which is attributed to the evident low price- sales proportion. Hence, Groupon was valued at $2.8 billion in the end of 2012 and this was a drastic fall in market capitalization. A situation that would put the company shareholder’s at the risk of losing their shareholding value of the company (Lachapelle, 2012). Hence, an acquisition of Groupon by Google would have various impacts to the shareholders of both companies. To begin with, the shareholders of Groupon would suffer a loss of their value given the fact that this company has experienced a downward fall in its overall profitability. The share value of the shareholders recorded a 23 percent surge in 2012 after the company went public in 2011. The company was valued at $16.7 billion just after the initial public offer and the same company was later valued at 2.8 billion in one year period. This fall in the company’s market capitalization would in addition have a pessimistic blow on the shareholders wealth.
Accordingly, the firms share value is now priced at a low $7.1 per share. Hence, at this time the shareholders value has declined and this is evident from the low share price. However, before the company went public the shareholders wealth was at a good position given that the company was valued at $6 billion. Thus, an acquisition by Google would mean that the shareholders of Groupon would have to give up their shareholding at a low value of $7.1 per share. This would further affect their receivable premiums from the acquiring company since they would be much lower. Furthermore, the shareholder’s premium would be at risk of losing a given ration of their premiums that have been pledged given that there would be no synergies to materialize after the acquisition deal (Gaughan, 2001). Conversely, given the current downward trend of the company in performance, the acquisition would also give some positive impacts to the shareholders of Groupon. It is estimated that Groupon would experience a slow growth in revenue of up to 0.6 % in 2015 given that the company was experiencing a 45 % revenue growth in 2012. Thus, the company has no future capital gains that the shareholders would expect to reap with the ongoing downfall of the daily-deal company. Hence, an acquisition by Google would offer the company a platform to improve its revenue growth because Google has enough money to increase the investment ability of the company.
Therefore, the shareholders would also be in a better position not to face a market exit of the company which would have gravitating impacts on their shareholders value. Consequently, the shareholders of Google, the acquiring company would also be impacted by a possible acquisition of Groupon. Currently, the share price at Google is on a high of $550.51 and the company has a market capitalization of $370 billion. This is definitely a company that has great opportunities and prospects for its shareholders. However, an acquisition of Groupon would have an impact on the shareholders value at risk (SVAR) for the shareholders of Google. This is because the said acquisition would not have viability to produce the needed post acquisition synergies to drive the combined company. However, the shareholders of the acquiring company would enjoy the low price per share of Groupon on acquisition but the impact of this on their shareholders wealth would be based on the post acquisition synergies of the combination. If the combination would yield strong synergies to facilitate the company after acquisition the shareholders would accrue returns which would improve their shareholder value in the combined company. The two companies have differentiated financial conditions.
The acquiring company that is Google is at a better financial position enjoying a $370 billion in market capitalization and a share price of $550.51. However, the target company that is Groupon is under tough financial conditions given its downward performance, the organization now has a sell capitalization of $4.58 billion and a share price of $7.1 per share. The different financial conditions of the company would mean that the target company would be at position to enjoy increased investments resulting from the acquiring company which has a huge capital base (McClure, 2012). The target company has had experienced the worst business pattern since its IPO that was able to increase the company’s market capitalization to $16.7 billion in 2011. However, this figure dropped to $2.8 billion in 2012 and it is now at $4.58 billion. This is an indication that the company has experienced a reduction in its sales revenues and this puts the company in danger of facing an exit from the market if the poor financial results would persist in the future. On the other hand, Google which has very good financial refection is also contemplating on undertaking an investment project that has been estimated to accrue the company $471,011.84 in net present value. Thus, it is evident that the acquiring company will continue to exist along its upward curve in terms of profitability and financial performance.
Hence, the company is experiencing an excellent market performance without the rumored acquisition and it would be prudent if the acquisition would also add up to its profitable investments. Based on this analysis, the following recommendations would be indispensable to both the shareholders of the acquiring company and the target company. To begin with, I would recommend the shareholders of Google not to invest all their money in Groupon Company which is under tough financial conditions. However, the shareholders of Google should seek to acquire the product line of Groupon that is deemed as most profitable for the company and that would be the online coupon service (McDonald, 2006). This is because investing their wealth in the entire company would be disastrous to their shareholders value in case the combination does not yield comprehensive post acquisition strategies. Consequently, I would recommend the shareholders of Groupon to undertake the acquisition by Google. This is due to the reason that Google has a huge market capitalization and it is enjoying an excellent financial situation in its business.
Thus, this would help greatly in reviving their almost falling company and hence assist in improving their shareholders value. This would consequently result to an increase in the shareholder’s wealth. It is true that one combined Google and Groupon would be more profitable than being as separate entities. This is enhanced by various elements which are essential for an acquisition. To begin with, the combined company would establish integration teams that would the desired relationship between the two firms and this would influence their performance as one company. Secondly, the combined company would also enjoy high quality leadership that is sought from key management members of the two companies. Good leadership would translate into improved performance by the two companies. The acquisition would also allow for the retention of important employees who would ensure a smooth transition in the post acquisition stage.
Lastly, the combined company would be profitable because it would be guided by acquisition results that must be achieved. However, the acquisition might not be successful and hence the combined company would be less profitable as compared to the independent companies. To begin with, the slowdown after acquisition would be caused by the escalating commitments that would face the management team of the combined company. Hence, it is possible that managers would be under extreme pressure that might affect their performance thus, putting the combined company at risk of failure (Erdogan, 2012). It is also a possibility that the combined company might be deceived that it is adopting the best practices of mergers and acquisitions, and yet that would not be the case. Finally, the acquiring company can overemphasis on the importance of the purchase price to them and forgets other critical areas of the acquisition. This presents a downbeat outcome on the profitability of the combined company.
Erdogan, A.I. (2012). The determinants of mergers and acquisitions: Evidence from Turkey. International Journal of Economics and Finance, 4(4), 72-77. Retrieved May 2012 from http://www.ccsenet.org/journal/index.php/ijef/article/view/15911
Gaughan, P. (2001). Mergers and acquisitions: An overview. Retrieved May 2012 from http://media.wiley.com/product_data/excerpt/79/04714143/0471414379.pdf
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
McClure, B. (2012). Mergers and Acquisitions. Investopedia. Retrieved May 2012 from http://www.investopedia.com/university/mergers/
McDonald, J., Coulthard, M. and De Lange, P. (2006). Planning for a successful merger or acquisition: Lessons from an Australian study. Journal of Global Business and Technology, 1(2), 1-11. Retrieved May 2012 from http://agb.org/sites/agb.org/files/u16/Vanguard%206.pdf
Paramasivan, C. & Subramanian, T. (2009). Financial Management. New Age International.