Management and the Technology Professional – B302

Case study answer 3

As the software engineer I would start the project. The decision tree indicates that starting the project has a benefit of £45,300 over the benefit of -£18,000 associated with cancelling the project. The NPV also indicates that starting the project would yield a benefit. The obvious preferred path is for Microsoft not to take over Yahoo!, removing the extra £20,000 expense, but this event is out of the control of the software engineer.

The probabilities used in the analysis are generated from the facts and known variables from historically similar events and publically available knowledge. The probability of Microsoft acquiring Yahoo! is estimated at 80%. The reason for this is because firstly because of the value Microsoft has placed on the Yahoo! shares. In offering over a 60% increase in the value of Yahoo!’s shares at the time, Microsoft firmly establish themselves at a serious buyer, and at such a high premium keep other buyers away. The majority of Yahoo! shares are owned by other companies and investors, and Yahoo!‘s share price has recently been falling due to its failed advertising product, leading to the recent resignation of the CEO. Whilst some senior Yahoo! executive who also own shares in Microsoft may make a loss, the majority of the shareholders should be welcoming to the offer made by Microsoft. Yahoo! has also taken steps in the last couple of months to review their severance package and put in place a revised “Report of unscheduled material events or corporate changes” indicating that the process has begun internally in preparing for the merger. It is unlikely that the anti-trust authorities will oppose the transaction as several other transactions which fit a similar profile were allowed, the AOL Time Warner merger and Google’s recent acquisition of DoubleClick are examples of two.

The additional probabilities of successfully completing the project and failing the project are generated from the type of project that Yahoo! has been asked to undertake. A 95% chance of successfully completing the project is a fair weighting given that Advertising is something that forms Yahoo! core business model. If the project had been research and development or sales then the probability of success would be substantially lower.

The k value is generated from the current high street value of a bank loan added to the risk associated to the project. The value of interest per annum on a high street loan is 8.9% and the value of risk associated with this project is 2% as the risk is deemed to be very low (5% of failure).

Whilst this decision tree and NPV provide data to make an informed decision about the option to start or cancel the project, they do not necessarily indicate the best choice to make. It is common that the best choice also yields the highest NPV and value and the decision tree, but this may not always be the case. These processes are designed to help extract more data about the event that you are trying to decide on, so that the decision that is made isn’t a bad one.

If all the data was taken away from me, as the software engineer I would still do the project. This is because of the commitments that I may have made to the customer to do the work or to continue to uphold the perceived commitment of Yahoo! to deliver to its customers. In a time where a merger is an almost certainty, remaining committed to my job and to the customers would be a top priority.