Management and the Technology Professional – B302
Case study answer 3
In order to complete the decision tree I needed to calculate the probabilities of each event occurring, these are based on external sources and related past events. Firstly the overall probability of Microsoft acquiring yahoo, i’ve set these values at 0.2 for not acquiring and 0.8 for acquiring. I arrived at these figures through reports in the media, and the past actions of any government agency that could block the acquisition. Microsoft has massive resources and often once they announce intention to acquire another company little can be done to stop it, this independant of the nature of the takeover (e.g. hostile). Therefore it’s likely to take place, given Microsoft’s past record, and the ‘bear-hug’ letter that was sent to yahoo, in part threatening the option of a hostile takeover: “Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.” (Davidoff).
The Net Present Value (NPV) for the project’s completion (which is the most probable path) varies between two routes, the difference in these values being £18,851.92. The path of Microsoft acquiring Yahoo gives a NPV ≈ £41,710 whereas if it didn’t go through the NPV would be ≈£60,562, the higher expected value being that of completion via Microsoft’s acquisition (gross £36,000).
Therefore taking into account the variables of opportunity, risk, interest and the comparison factor in k (0.03 in this case), the project should be accepted. Obviously the value of the project would be higher if Yahoo wasn’t acquired, however the probability is that the project will be completed by the joint company (72% net), as shown in the diagram.
NPV (acquisition)= 41,709.87
NPV (non-acquired) = 60,561.79
-25,000/(1+0.03)^1 = -24271.84
-20,000/(1+0.03)^2 =-18851.92
90,000/(1+0.03)^2 = 84,833.63
Bibliography
Davidoff, S. (n.d.). How Microsoft Could Go Hostile. Retrieved from Dealbook.
