Management and the Technology Professional – B302

Case study answer 3

Imagining myself as a Yahoo software engineer as part of the small business advertising division. I have just received confirmation from a client of the possibility of a new advertising campaign. I need to assess whether it is worth while conducting the campaign and also the effect if Microsoft succeeds in its attempt to acquire Yahoo. I decided to use a decision tree to map my options, then calculate expected values and also calculated a net present value (NPV) on the decision tree to gauge any gains or losses.

This project would give a revenue value of £90,000 on completion and is planned to have a duration of 4 months. The project requires a commitment at the start for £25,000 from Yahoo to pay setup and inter-agency fees, this would not be recoverable even if the project failed to be completed. An additional factor is the ongoing attempt for Microsoft to acquire Yahoo, if this were to go ahead there would be an additional cost of £20,000 at the completion of the project for changes to the advertising contracts. If the project is not started I believe there is no loss or gain.

Next I needed to come up with probabilities for the decision tree.
I would reason that Yahoo would have a very high success probability (90%) of completing the campaign, this is due to advertising being a large part of their business portfolio through their on-line activity. Though it would have been around the 95% probability but for the recent problems with the Panama Advertising system, as discussed in the article “A $45 billion bet” in the Economist.com.
I would reason that Microsoft has a high probability (75%) of successfully acquiring Yahoo. This is due to Google holding a monopoly in online search and advertising. It would be good for competition to have Yahoo and MSN (Microsoft) join forces to provide more competition in the market, even with the joint competitor, Google would still have a sizeable advantage. The only factor to stop the acquisition, I believe , would be the antitrust authorities ruling against Microsoft as they have been under scrutiny by them before but this was connected with the desktop software market. Microsoft would have a strong case that if they were to be put under antitrust scrutiny with their acquisition of Yahoo, Google should also be, due to their recent acquisition to consolidate their market advantage. This was discussed in the article “The Microhoo! hoo-hah” in the Economist.com

I calculated the expected values for the option to start or cancel the project, by multiply the future values by the probabilities then adding any values at the summations on the decision tree. I got expected values to be £42,500 for starting the project and £0 for not starting the project. It is clear from the probabilities that I believe events are going to occur at that it is highly likely that this project will add value to Yahoo.

To work out the Net Present Value requires future values which are stated earlier, a value for N which is 2 – 1 = 1 for the time duration in this case and a value for K being 0.03, this represents the interest on the sums being used it would be 0.09 over 1 year but as the duration of the project is 4 months the 0.09 / 3 = 0.03.

Through carrying out a knowing the future values on the decision tree I was able to calculate the present values.
• Project Started - Projected Completed - Microsoft acquiring Yahoo
o £43,689.32
• Project Started - Projected Completed - Yahoo remain independent
o £63,106.30
• Project Started - Project Failed
o -£24,271.85
• Project not Started - Microsoft acquiring Yahoo
o £0
• Project not Started - Yahoo remain independent
o £0
With the NPV of both the paths of the project being completed successfully giving a healthy return and there being a low chance of making a loss I believe it shows it would be worthwhile to start the project. If the project is not started though there is no loss or gain to Yahoo.

I believe with both the expected value and NPV show positive values that it would be suitable to begin the project, with the probability of failure to complete the advertising campaign being low due to Yahoo experience, there is a high probability of Microsoft acquiring Yahoo adding an additional expense of £20,000 but I don’t think this a concern as the project would start in March 2008 with a duration of 4 months, it would be completed at the latest in July 2008. With the acquisition beginning on the 31st January 2008 and the article “A $45 billion bet” at the Economist.com stating the acquisition would not be complete until the end of the year.