Management and the Technology Professional – B302
Case study answer 3
There are a few factors to take into account when calculating the probabilities that Microsoft will or will not acquire a merger with Yahoo, these are:
• Information is available relating to a failed merger between yahoo and Microsoft where yahoo remained independent indicating that Microsoft have failed to acquire yahoo in past.
• The offer from Microsoft is $44.6 Billion; this sum offered by Microsoft is enough to scare any other potential rivals from any interest so this increases the possibility that Microsoft will be able to secure the merger.
• Taking the share price value as $29.15 (after hours 07/03/08) compared to the premium offered of over 60% of Yahoo’s share price by Microsoft, this is a vast increase and will help Microsoft in acquiring Yahoo.
Taking these points into account I will assume the probability of Microsoft acquiring yahoo as 60% (0.6 on tree) and the probability of Microsoft not acquiring yahoo as 40% (0.4 on tree).
Yahoo are used to dealing with advertising projects, these projects are Yahoo’s source of income therefore the chances of yahoo succeeding is high I have set a probability of succeeding as 90% (0.9 on tree) and the probability of the project succeeding as 10% (0.1 on tree).
From the website:
http://www.alliance-leicester.co.uk/loans/index.asp?page=home
Researched the banks fixed low rate loan value of 6.9% typical APR (annual percentage rate). This 6.9% was the interest over an annual period, as the period for the assignment was 4 months the value of ‘K’ can be worked out.
12/4 = 3
6.9/3 = 2.3
K = 2.3% over the 4 monthly period
Woking out present value:
Present Value = Future Value/(1+k)^N
Present value 1. 56K = 16,096
Present value 2. 58.5K =17,727
Present value 3. 27K = 8,181
Present value 4. 26K = £7,807
Present value 5. -2.5K= £-750
Present value 6. -36K= £-10,810
Present value 7. 0K= £0
Present value 8. -36K= £10,810
Working out the NPV= Convert all values along each path into present values and add the sum together
calculating the present values:
project succeeds and microsoft acquire Yahoo: 16,096 + 17,727 + 8,181 = £42,004
project succeeds but microsoft does not acquire Yahoo: 16,096 + 17,727 + 7,807= £41,630
project doesnt succeed: 16,096 + -750= £15,346
project was cancelled and microsoft acquire Yahoo: -10,810 + 0= £-10,810
project was cancelled but Microsoft does not acquire Yahoo: -10,810 + -10,810= £-21,620
we can see from these values that they are all positive and so the project should be completed, to check this we can add up all NPV's assuming the project is started and dividing by the number of paths (3) we can see that the project value is positive:
42,004 + 41,630 + 15,346= 98,980/3 = £32,993 (average project turnover)
with this information as the Yahoo software engineer i can see that the project is more likely to be a success therefore i would accept the client project proposal. by not accepting this project would be a loss of potential revenue.
