Management and the Technology Professional – B302

Case study answer 3

Before a calculated decision can be taken on whether to start or cancel the given project, first probabilities must be assigned to the chances of a Microsoft takeover of Yahoo and the chances of the project, if given the go ahead, being a success.

Firstly, what is the probability of Microsoft acquiring Yahoo? Microsoft has unsuccessfully attempted a takeover or a merger on two previous occasions. Yahoo at the time was attempting to revolutionise its advertising system with the aim of increasing its market share. This, unfortunately for Yahoo, failed and it has seen its share prices and their market share continue to fall. Microsoft now has offered 60% more than the stock market value for Yahoo so chances of a merger or takeover are higher now than they have ever been. Due to the chances of a takeover the probability has been set to 60%.

Secondly, the probability of the project succeeding once started is going to be set to 70%. This is due to Yahoo having a vast amount of advertising experience, evidence of which can be seen by the size of the company today. The probability is not higher due to its recent failure to revolutionise their online advertising system.

When these values, including the ones given in the case study are entered into a decision tree, the start and cancel expected values are £2600 and -£36,000 respectively. Straight away this would suggest starting the project. However, there are other considerations to be taken into account. If the project were to be started but for some reason or other failed, the future value for this scenario would be -£115,000, compared to £0 if the project were cancelled before it started. If the project were cancelled Yahoo could potentially miss out on an expected outcome of £65,000 if the project is a success and Microsoft does not win a takeover bid. Even if Microsoft did win a takeover bid the future value would still be £45,000. The net present value, or NPV, of the project being started and Microsoft winning a takeover bid is £42,418 compared to £61,269 if it is not successful takeover bid. Point to note, the present value was calculated using the future value/(1+0.03)2.

Nobody in business has ever made money without taking some sort of risk. This risk can be minimised by using aids such as a decision tree. With the values in the decision tree, the best option, in my opinion, is to go ahead with the project. Even if the project fails, for such a big organisation loosing an expected value of -£115,000 isn’t going to alter their share price significantly more than the day to day trading does. However, by gaining £65,000 (or £45,000 if Microsoft wins a takeover) it may be the catalyst to Yahoo regaining some of the market share.