Google's potential acquisition of Groupon and shareholder value

Google Groupon

The world of big business is often filled with takeovers, mergers and acquisitions. These types of transactions are often very impactful and can send serious changes across the financial landscape. It is therefore very important to students of financial and economic systems to investigate and measure the utility of these types of trades. The purpose of this essay is to examine an specific example where a potential merger is investigated to achieve this objective. In this case, this essay will argue the recent rumors of Google acquiring Groupon and the ramifications of this event. The essay will attempt to answer if this potential acquisition would add value to the shareholders of each corporation in order to make an executive decision as whether or not to recommend such a transaction.

Mergers and Acquisitions

Benefits of Mergers and Acquisitions are the main reasons for which the companies come into these deals. Mergers and Acquisitions have the ability to produce significant tax gains, can increase revenue and can reduce the cost of capital. Mergers and Acquisitions can also turno out to be truly valuable to the companies when they are experiencing hard financial times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can look for an acquisition deal to improve its competitive advantage. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated by this transaction. In this case, the target company benefits as it finds its way out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is due largely to these benefits that the small and less powerful firms agree to be acquired by the large firms.

These types of transactions and dealings will often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization.

The shareholders of the acquired company tend to benefit the most in these types of relationships. This is because it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders give up their shares, the company has to offer an amount more than the actual price, which is prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.

Recommendations

Mergers and acquisitions rarely work out in all stakeholders' benefit. In this case there seems to be no real winner in this deal. The net present value of Google, the difference between the present value of cash inflows and the present value of cash outflows would not see any positive change in this case. Groupon, on the other hand is a company in dispair and is reeling since this failed merger attempt. The NPV of Groupon continues to fall, making the merger that more unlikely.

Coontz (2004) shed light on the economic impact of mergers and acquisitions on acquiring firm shareholder wealth. His review of this subject suggested that this deal would not have worked out for either sides' stockholders. He claimed in his study that "I find that, on average, merger or acquisitions, in the 15 firm sample, do not, on average, improve shareholder wealth of the acquiring firm; rather, it actually decreases it. This is important be-

cause the function of a company is to make money and transfer the profits to the stakeholders and risk takers of the corporations, the shareholders. If the goal is to maximize shareholder wealth, why would a corporation want to merge or acquire another firm if data suggests that it actually worsens shareholder wealth? " (p.69).

There is too much risk today for Google today to complete this deal and I would recommend for Google to avoid it. Groupon, as a surviving company and maybe at the risk of its stockholders, has much to gain by being adopted by the giant Google company. Success in mergers and acquisitions requires a balanced and holistic solution that benefits all the key players in the transaction, there appears to be no sign of balance in this lopsided deal.