The aim of this paper is to compare the viability of two companies forming an unrivaled business entity that have a great influence on the world companies. Also, the research utilizes the capital budgeting technique of NPV used by the financial managers as an important tool for wealth maximization and ascertaining the potential of investing in a particular project. The mergers and acquisitions and their influence on business entities are also investigated.

Year

Cash Flow

PVIF (11%)

PV(Present Values)

0

($2,425,000)

1

($2,425,000)

1

450,000

0.9009

405,405

2

639,000

0.8116

518,612.4

3

700,000

0.7312

511,840

4

550,000

0.6587

329,350

5

1,850,000

0.5935

1,097,975

Totals

$2,863,182.4

NPV=PV (Inflows) - PV (outflows)

NPV=$2,863,182.4-$2,425,000=$438,182.4

The project should be accepted if the net present value is positive. I recommend that executives and shareholders of Google should make investments, since the NPV is positive. The net present value is a modern capital budgeting technique that discounts outflows, so that the viability of an investment can be ascertained. If the NPV is more than zero, the firm will earn a return greater than its cost of capital enhancing the market value of the firm and the shareholders’ income. Cash flows of the investment should be forecasted based on realistic assumptions.

Year

Cash Flow

PVIF (9%)

PV(Present Values)

0

($2,425,000)

1

($2,425,000)

1

450,000

0.917

412,650

2

639,000

0.842

538,038

3

700,000

0.772

540,400

4

550,000

0.708

389,400

5

1,850,000

0.650

1,202,500

Totals

$3,082,988

NPV= $3,082,988 - $2,425,000 = $657,988

The potential Google acquisition for Groupon would not add value to the shareholders of both corporations since the company is worth $2.8 billion currently and Google wanted to purchase it at $6 billion. Groupon has decreased by 79% by the end of 2012, and it fetches a low price to sales ratio. As the competition increases and the demand declines, analysts predict a slowing down trend for Groupon’s revenue growth by 0.6% in 2015 and down 45% in 2012. The decision by Groupon to address public through the trading of its shares complicated the situation; while Google seemed to be better organized to make more investments in terms of resources on its business than acquire the Chicago based company. Also, the fact that Groupon diversifies income from simple coupons to goods, discounted goods store available online for, many possible buyers that have not run traditionally retail shops are deterred. The existing buyers of Groupon buy less, their sales force is declining as they do not have technology and the interest by Google’s in the company is worth questioning. The acquisition of the company cannot add value to the shareholders of both companies since Google is well-established and successful, while Groupon is declining and will need a lot of capital to revive its operations to profitable stability (Scott, 2008). The Groupon share prices in the stock market are also declining rapidly.

Based on the findings and analysis, I would recommend that shareholders of Google and Groupon should consider whether the share prices in both companies have enabled them to maximize their shareholders’ income. Then, based on their findings, they should decide whether they should continue their investment in both companies or seek alternative investment opportunities in other companies. Also, I recommend that shareholders should forecast the revenue and sales growth of their companies, so that they can determine whether their companies can gain the required level of returns.

In case there is no acquisition, Google shareholders will continue to increase their net worth, and contribute their ideas to the overall success of the company. The company stock in the exchange market will continue to increase and hence, will add the value for the firm. The profitability levels due to sale proceed, thus, revenue growth will continue to increase.

In case there is no takeover, the Groupon shareholders will continue to decrease their net worth due to a decrease in the revenue growth and the value of the firm in the stock exchange market. The shareholders risk losing their investment in case the company plunges into bankruptcy or shuts down. The profitability levels are declining and revenue growth and sales are minimal. The company may use all shareholders’ money in an attempt to regain its core business only to incur further losses.

The financial conditions of Google are substantial as the company has a positive net present value indicative of its increased value in the market, and an increase in maximizing the shareholder’s wealth. The financial conditions of Groupon are bad considering the fact that the value of the firm has reduced to $2.8 billion. Yet, Google wanted to place a bid of $6 billion. Also, the company has reduced by 79% in less than one year time. The revenue and the sales growth of the company are also declining rapidly.

The combination of Google and Groupon may be profitable since the shareholders of the smaller company such as Groupon may own the shares of Google, a bigger and well-established company. Hence, it increases their overall net worth. An acquisition enables the company to enjoy economies of scale in production, lower unit costs or cost savings, advantageous technology in the case of Groupon, and the best management practices that are vital for the running of the organization (Ross et al, 2002). The combined entity might be less profitable than two companies operating independently if the acquisition results in high costs for the acquiring company, or if a conflict of objectives arises, which makes decision making difficult and causes the disruption of business activities.

The module 5 SLP has enabled me to understand and appreciate the use of NPV as a modern capital budgeting technique useful in making investment decisions for wealth maximization and discounting outflows to ascertain the viability of a particular investment decision. Also, the module has highlighted the importance of mergers and acquisitions in the establishing highly profitable and successful business enterprises. I have mastered the use of NPV calculations in the modern day business environment and their application to make safe investment decisions.

The net present value is the difference between the cash inflows and the cash outflows of an investment project. The NPV is applied in the capital budgeting decisions to maximize wealth and is also applied to the project appraisal methods to ascertain the viability of that particular project. The success factors in mergers and acquisitions is relate to the increase in the overall net worth of the shareholders. Companies enjoy economies of scale due to massive production and the best management practices as a result of the integration of management practices of the combining companies.

The financing options for mergers and acquisitions include borrowing money from the banks as a debt finance to be repaid on loan repayment contractual terms with the bank. The issue of company bonds to increase the funds required to make an acquisition, and the share deal that allows the shareholders of the target company to own majority shares in the acquiring company (Besley & Brigham, 2003). There are high risks in terms of costs involved in mergers and acquisitions and also the risk of losing capital cost in the combining of a successful company with a declining one that requires massive financial support. The valuation in mergers and acquisitions would involve the sales proceeds made, the revenue growth and the overall profitability measured in terms of the returns to the shareholders.

The evaluation of this assignment shows that there is a need for companies to cooperate in order to have a competitive edge over other similar corporations. Therefore, they dominate the market over other similar ventures. Companies should also use project appraisal techniques such as NPV to determine the viability of investment opportunities. The companies engaging in mergers and acquisitions should also estimate the gains and the costs of the gains that are associated with this type of combination. A critical evaluation shows the validity and the viability of companies operating in a merger or acquisition to integrate their business ventures to enhance their profitability, sale proceeds, growth, and expansion strategies.

Order now

Related essays