Management and the Technology Professional – B302
Case study answer 3
There are many factors to take into account when trying to decide the probability that Microsoft will take over Yahoo. Such as the probability Microsoft will continue its bid for Yahoo, the probability Yahoo will accept the offer and the probability that the regulators will accept any associated risks to the industry.
It is clear from the many articles and reports about this takeover bid that Microsoft are very keen to proceed. Microsoft needs to take over Yahoo in order to compete with Google’s 66% share of the market. Yahoo has been unsuccessful with its competing products against Google and the Microsoft takeover would increase Yahoo’s/Microsoft’s size and industry share giving it more power to compete against Google.
Microsoft’s share price is currently 27.87 (09/03/08), however it has been on a continuous decline since Novembers and Decembers figures loosing almost 10 points to date. This shows that Microsoft are loosing company value and are in a less wealthy state to takeover Yahoo as they were when they made the offer. Around the same time Yahoo was on a record 4 year low of 19.05, this made it the best time for Microsoft to make an offer to Yahoo. However after Microsoft announced its takeover bid, Yahoo’s share prices increased considerably. In conclusion of this stock information it is clear that as time has gone on, the risk involved with the takeover for Microsoft has increased.
The most influential probability to affect the likelihood of this takeover being successful lies with the regulators. The regulators can decline the takeover bid on the grounds that Microsoft would vastly expand and potentially cause further industry monopoly problems. Not just the operating systems industry but also in the internet advertising industry. On the other hand there is the problem that if they do decline the takeover bid then Yahoo (already cutting jobs) could go bankrupt leaving Google with up to 80% of the market. This would leave very little probability that any company will compete with Google in the future anywhere near as much as Yahoo has. If Google doesn’t have any competitors then it can charge as much for its products and advertising as it wants in the knowledge that the customers cannot go anywhere else.
There is no other better example that can be directly related to this other than the Microsoft takeover of Hotmail back in 1998. Microsoft saw the success of Hotmail and saw the potential of acquiring the company. Hotmail was the first company to offer email for free and as a result was very successful. Microsoft took over this company very much like they want to with Yahoo and added it to their family of services. Upon integration of the two companies the collective site traffic for each company’s website could be linked and the customer base shared. This is just one example of several successful takeovers by Microsoft.
On analysis of this information I believe there is greater likelihood of Microsoft succeeding in its bid to takeover Yahoo with an 80% chance, leaving a 20% chance that Yahoo will remain independent.
It can be seen from the decision tree that it is much more beneficial to start the project than cancel it, two of the net present values are in the favour of making the decision to start the project. The third net present value predicts a loss if the project fails, however there is a very small probability of this happening as there is very little evidence that suggests the project will fail. There is an expected value of £41,600 if I start the project compared to a project loss of £18,000 if I cancel the project, clearly we don’t want to make a lose so this is not desirable.
There is an ethical issue with regards to Yahoo remaining independent as Yahoo may have to make staff redundant. They may have to make more staff redundant than expected if I spend the initial £25,000 (which is unrecoverable) if Microsoft does not take over the company. This might also mean a failure of the project and lost potential revenue of £90,000 which also contributes to there being less money to pay employee’s wages. However I believe there is a very small chance of this happening as I believe Microsoft will take over Yahoo with promises of keeping all the staff. Even if Microsoft does not take over the company, the very act of offering over £40Billion publicly to Yahoo has causes Yahoo’s stock prices to shoot up, which means better prospects for the company’s wealth.
Another risk factor to take into account is that if Yahoo stays independent and goes bankrupt during the project then the client will have paid for services that we cannot provide. I believe this to be a very small risk as the stock prices have risen from Microsoft's bid.
The decision I would make as the software engineer for Yahoo would be to accept the project. The potential future revenue of £45,000 or £65,000 is worth the small risk of the project failing, if the future revenue figures were around the £30,000 figure then I would find it too much of a risk to take for such little revenue.
My decision to start the project is entirely based on the provided information, should I actually be the software engineer there may be other factors to take into account. For example I may only have a certain budget for my department and it might not be possible to provide the immediate £25,000 for the setup fees. There may also be some ethical factors to take into account that would affect my decision.
Appendix
Cnet, Microsoft buys Hotmail, Date accessed: 09/03/08,
http://www.news.com/2100-1033-206717.html
Fair and square, Loan at 6.9%, Date accessed: 08/03/08,
http://www.fairandsquare.co.uk/default.aspx?REF_ID=21112060&icid=K008-12994256-080CEVAPPC13961=K
Microsoft, Msn Hotmail, Date accessed: 09/03/08,
http://www.microsoft.com/presspass/features/1999/02-08hotmail.mspx
Yahoo, Yahoo Stock, Date accessed: 09/03/08,
http://finance.yahoo.com/q?s=YHOO
Yahoo, Microsoft Stock, Data accessed: 09/03/08,
http://finance.yahoo.com/q?s=MSFT
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