Question

According to the Wall Street Journal, merger and acquisition activity in the first quarter rose to $5.3 billion. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. The largest IT transaction of the quarter was EMC’s $625 million acquisition of VMWare. The VMWare acquisition broadened EMC’s core data storage device business to include software technology enabling multiple operating systems – such as Microsoft’s Windows, Linux, and OS X – to simultaneously and independently run on the same Intel-based server or workstation. Suppose that at the time of the acquisition a weak economy led many analysts to project that VMWare’s profits would grow at a constant rate of 2 percent for the foreseeable future, and that the company’s annual net income was $39.60 million. If EMC’s estimated opportunity cost of funds is 9 percent, as an analyst, how would you view the acquisition? Explain.

Answer 1

Unfavourable

Explanation:

Remember, the acquisition of VMWare cost EMV $625 million, although analyst reports put VMware's current worth at $39.60 million. It implies that EMV paid far more than the present and future with for VMWare.

To prevent loss EMV would have done careful analysis since it was in a weak economic state at the time of the acquisition.

Answer 2

Unfavorably - the price is more than the company is worth.

Step-by-step explanation:

Unfavorably - the price is more than the company is worth because even if VMWare’s profits would grow at a constant rate of 2 percent for the foreseeable future.

The company annual net income will be $39.60 million and the largest IT transaction of the quarter was EMC’s $625 million acquisition of VMWare this simply means Unfavorably due to the fact that the price is more than what the company actually worth which will definitely affect the acquisition process between the two parties because the company was suppose to be worth more than the price.