Paper, Order, or Assignment Requirements
PART A – TARGET SELECTION AND FIRM VALUATION (30%) Google (now Alphabet Inc.) is seeking to grow through M&As. Your major task is to locate one potential target that would interest Google and make a deal. Towards this end, you and your team are required to investigate all the listed firms in the U.S. There is no limitation on the industry in which the potential target firm operates, as long as there are decent synergies that can be created through this M&A and it fits the current and future strategic goal(s) of Google. It’s a challenging task, so you and your team should do it step by step accordingly. Step 1. Analyze Google Inc’s strategy, market position and industry overlook. Conduct a full SWOT analysis (Strengths, weaknesses, opportunities and threats) of Google. Hint: Useful information can be obtained from Google’s most recent 10K Annual Report, business news or other reliable sources. (5 marks) Step 2. Decide whether Google should make a vertical or horizontal M&A and justify your choice. (2 marks) Step 3. Set the M&A search criteria and identify three listed firms that would potentially interest Google. All the selected potential target firms must have at least five years of accounting information necessary for valuation. To check the availability of accounting information, search for the firm’s 10K annual reports at the following link: https://www.sec.gov/edgar/searchedgar/companysearch.html Briefly discuss (and justify) the criteria that you have used to identify the three target firms. Hint: Some examples of selection criteria are: a. Is the firm in alignment with Google’s vision, long-term strategy and growth objectives? b. What are the potential synergy gains? For example, it could be young firms with a pipe line of innovative projects that may lead to promising products in the future; firms with strong expertise that allow Google to expand its existing expertise in engineering and other functional areas; firms having a presence in a fast-growing industry in which Google wants to enter in; or firms with strong names that can help Google to gain more market power, etc. Here, do some brainstorming! c. Does the firm have post-integration potential, i.e., how likely can Google successfully integrate the firm’s business, technology, human capital and other resources to produce the synergy gains that Google intends to achieve through the acquisition of the firm? (10 marks) 1 For more information on Google’s name change to Alphabet, see “Larry Page Changes Google’s Name to Alphabet — Should You Buy?”, Forbes, 10 August 2015, at https://www.forbes.com/sites/petercohan/2015/08/10/google-changes-its-name-toalphabet/#36161fe9560b. EFB343 – Corporate Finance Group Assignment Semester 1, 2019 3 Step 4. Narrow it down to one particular target. Use the Free Cash Flow Methodology to estimate the value of the target firm and its equity. It shall establish the minimum price of the target firm. Here you need to use the target firm’s past five years financial data to forecast the firm’s future sales, variable cost, fixed cost, depreciation, working capital and capital expenditure. You then need to work out the WACC (Weighted Average Cost of Capital) which will be used as the discount rate for your free cash flow analysis. Below is a step-by-step guide: Construct future cash flows: – Use the average growth rate in sales over the last five years to forecast sales in the next 4 years. – Variable cost is assumed to grow at the same rate as sales. – Use the average depreciation over the last five years as the depreciation for the future. – Use the average fixed cost over the last five years as the fixed cost for the future. – Use the average sales to working capital ratio over the last five years to work out future level of working capital. – Use the average capital expenditure over the last five years as the future capital expenditure. – Make assumptions about the growth rate of future net cash flow after year 4. Justify your assumptions. Calculate the discount rate (WACC): – Get the equity beta for the firm from Yahoo Finance; Risk free rate is assumed to be 2% and market risk premium is assumed to be 5%. – Work out the cost of debt of the firm by checking its interest payment and long-term debt. The information is generally available from the firm’s 10K annual reports. – Use the book value of long-term debt (or total liability) and market value of equity to work out the proportion of debt and equity in your WACC formula. Calculate the value of the target firm: – Find the present value of the cash flows for year 1-4 as well as the terminal value to get the value of the firm. (13 marks) ** Keep all your formulas as simple as possible – don’t go overboard and make them unnecessarily complicated. It makes your assignment difficult to understand which can lead to us not allocating you part marks for your effort, particularly if your answer is incorrect! ** PART B – INDIVIDUAL SELF-REFLECTION (5%) Your lead partner commends you on your group effort in preparing the preliminary report for his perusal. As a final task, he has asked each of your group members to reflect on their personal experience working in a group in such a fast-paced and competitive working environment. Specifically, he has asked each of you to address the following two issues (make sure you address both): 1. Reflect on your contribution to the group and the performance of your own task(s). Hint: You can discuss your contribution to various group processes such as formation of the group, organization of group meetings, allocation of the task(s), formation and enforcement of group policies designed to deal with team problems (e.g., free-riding), and provision of feedback to other group members. (3 marks) EFB343 – Corporate Finance Group Assignment Semester 1, 2019 4 2. What are the two main lessons you have learned from this team work that you can apply to your future team work at university and/or in professional practice? (2 marks) As you prepare your reflection on the above two tasks, make sure to draw on specific examples to clarify your points.