Management and the Technology Professional – B302
Case study answer 3
If I was a Yahoo software engineer I would choose to start the project in light of financial risks and the probability of Microsoft acquiring my company or not.
To begin with I first ignored the possibility of a take over and focused on whether the campaign would succeed. I believe the project would have a 90% chance of success if started since advertising is nothing new to Yahoo! and just another routing operation. The 10% chance of failing is due to obvious reasons and based historical events such as the Panama advertising scheme, for example, that failed to live up to expectations.
Then the possibility of a take over must be analysed; what chance does the bid by Microsoft have of successfully acquiring my company. Firstly, Microsoft has a lot of conflicting ideologies and interests with Yahoo, Microsoft attracts a more “techy” crowd and specialises in proprietary software, whereas Yahoo likes to use open source software and has a fun loving approach to its business strategies. Microsoft must of course know this, and by still wanting to bid shows an act of desperation to grab a portion of the search and advertising market back. Microsoft currently holds a mere 2.9% of worldwide searches compared to Yahoo’s 12.8% in December 2007. With Yahoo’s current investor concerns and the decision to lay off hundreds of staff, this would further increase the chances of them accepting the bid. For these reasons I have decided that the bid from Microsoft would have 70% chance of succeeding and thus a 30% chance of Yahoo staying independent.
So how does that affect me as an advertising software engineer? I believe it doesn’t to a great extent, but we must still take it into account. And based on my decision tree I deduced that the expected value based on the uncertainty and those probabilities to start the project would be £65,900 and to cancel £-27,000. This shows it would be more valuable to start the project then to cancel it.
The true financial risk also needs to be calculated in order to re-enforce the above decision. To do this I calculated the present value for each stage of expense and revenue using the formula Present Value = Future Value / (1+k)N where N is equal to the number of periods (start>expense, expense>revenue) 1 or 2. K (time cost of money) I choose to be 0.0175. This was based on the current rate of interest from a high street bank being 5.25 divided by 3 (4month period rate) which equalled 1.75% interest for our 4month period.
Firstly the net present value for our project success and company takeover is ~£43,042 and for success with independence ~£62,360. With a difference of £19,000 we see that whatever Yahoo’s decision, the project will still create profit.
If the project were to fail then the net present value would be -£24,570 compared to -£88,452 if the project was cancelled.
Therefore from both financial and probability risk assessments we can see that the definitive choice would be to start the project, and hope the takeover fails so that Yahoo can make more revenue from this campaign!!
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