Вы находитесь на странице: 1из 31

Modeling for M&A Deal

Case Study: Google Acquisition Plan

Part A

Google Business and Acquisition Plan

1.0 Introduction Google is a global technology leader focused on improving the ways people connect with information. Google maintains the largest, most comprehensive index of web sites and other content and make this information freely available to anyone with an internet connection. Googles automated search technology helps people obtain nearly-instant access to relevant information from our vast online index. 2.0 Revenue Source Googles revenue is generated almost entirely from advertising. Googles advertising revenue is generated each time an individual clicks on a Google web ad (AdWords program). In order to increase the availability of Google search engine and expand the scope of its web advertisements, Google have created AdSense. In this program, web publishers can place the Google search box and targeted ads on their website in exchange for a percentage of the AdWords advertising revenue. The AdSense program has been responsible for a large portion of Googles growth and accounted for 44% of advertising revenues in 2010 3.0 Competitors Google face formidable competition in every aspect of its business, particularly from other companies that seek to connect people with information on the web and provide them with relevant advertising. Currently Google consider its primary competitors to be Microsoft and Yahoo. Google held 45% of the US search market, Yahoo 28% and Microsoft 12%. They are formidable opponents as both companies have had a presence in the web longer than Google and both have tremendous financial and technical resources. 4.0 SWOT Analysis Google strength is its strong brand, high quality product, financial resources and high caliber employees. Googles primary weakness is its lack of diversification. The usage of internet is expanding and Google having first mover advantage is looking at it as an opportunity. The convergence of internet and video related media is of particular interest to Google. However, in recent times the competition is becoming fierce posing a threat before Google. 5.0 Mission/Vision Google mission is to organize the worlds information and make it universally accessible and useful. Google will do its best to provide the most relevant and useful search results possible, independent of financial incentives. Its search results will be objective and it will not accept payment for inclusion or ranking in them.

It will do its best to provide the most relevant and useful advertising. Advertisements should not be an annoying interruption. If any element on a search result page is influenced by payment to Google, it will make it clear to its users. Google will never stop working to improve its user experience, its search technology and other important areas of information organization 6.0 Business Strategy Googles business strategy is based on its mission to organize all of the worlds information and make it useful and universally accessible. Google primary business strategy is product differentiation. Googles search engine uses a unique formula to retrieve pertinent information based on the users request. The formula gives Google users a more thorough and detailed search then other search engines. The formula utilizes page rank and hypertext matching technologies to determine the importance of a web site by analyzing the link structure of the web. Google AdWords product is its mechanism for differentiating Google from other internet advertising competitors. AdWords was developed to allow advertisers to target a specific group of prospected customers. It is beneficial to advertisers because it is an efficient way to target customers and advertisers only pay when their advertisements are viewed. 7.0 Implementation Plan Google has historically used acquisition as a method to accomplish its strategic objectives. Past acquisitions have included Pyra Labs in 2003, Picasa, Inc. (a digital photo management company) in 2004, Keyhole Corp (a digital and satellite mapping company) in 2003, and Urchin software (a web analytics firm) in March 2005. The company created its search engine and the majority of its other products through this strategy. As Google continues to grow and looks to diversify its product line, it has become practical to incorporate acquisitions into its implementation strategy. 8.0 Google Acquisition Objectives Googles objectives in pursuing an acquisition are as follows: First-mover advantages in convergence of media and technology Product differentiation Product diversification, overcoming weaknesses (e.g. reliance on one technology) Increased advertising revenue Expansion into new media markets Expansion into new distribution channels 9.0 Timetable

Activities First contact

Duration 1 week

Manager Googles Chairman and CEO, Dr. Eric Schmidt, will contact TiVos CEO, Tom Rogers, after the initial contact is made through Googles investment bank intermediary. Vice-President of Corporate Development, David C. Drummond David C. Drummond David C. Drummond David C. Drummond David C. Drummond Senior Vice President of Business Operations, Shona Brown CFO, George Reyes Dr. Eric Schmidt / David C. Drummond David C. Drummond David C. Drummond

Negotiation Signing of confidentiality agreement Signing of term sheet with no-shop provision Refining valuation Deal structuring Due diligence Financial plan Decision-making: proceed/walk-away Integration plan Closing

3 weeks 2 weeks 2 weeks 9 weeks 7 weeks 8 weeks 9 weeks 1 week 6 weeks 3 weeks

10.0 Management Preferences Management would prefer not to be involved in hostile takeover attempts. A friendly acquisition is necessary to ensure that Google does not overpay for the target and that implementation goes smoothly. Management requires total control over all technologies, patents, R&D and other intellectual property. Therefore, 100% of the target should be acquired. Due to Googles abundant financial resources, management prefers an all stock/cash transaction. Management is willing to share between 15% and 30% of the projected synergies with the target firms shareholders. Management requires that the newly combined firms be able to earn Googles cost of capital (11.6%). 11.0 Search Plan Primary Search Plan Googles primary search criteria are:

The target must be in the Entertainment/ Media Distribution industry. The target should have intellectual property assets in new entertainment technologies that will help Google to introduce products that take advantage of opportunities related to media and technology convergence. The targets value should not exceed $20 billion. Search Strategy The initial search generated the following list of potential candidates: TiVo, Cox Digital Cable, Comcast Cable, Cisco (owner of Scientific Atlantic, a manufacturer of set- top boxes), and Echo Star Communications. Secondary Criteria Google secondary criteria include: The target must have significant brand equity and market share. The target should be a publicly traded company. The target should be located near Googles Mountain View, CA headquarters (west coast, preferably in California). 12.0 Target Selection TiVo has been selected as the acquisition target, chosen for its large market share, recognized brand name, and numerous partnerships and licenses. The acquisition of TiVo would provide Google the vehicle to expand into new media markets. Google is the leader in the internet industry and TiVo is the leader in interactive television. Google can use TiVos expertise to enter peoples homes through new mediums. Googles profits are generated primarily from advertising and TiVo offers technology that allows advertisers to deliver relevant, engaging content and special offers in a more compelling way. The acquisition will also serve as a diversification opportunity for Google. One of its primary weaknesses is our lack of product diversification. A merger with TiVo allows Google to position itself not just a search engine company, reducing dependence on a single technology. Also, it would allow us to differentiate ourselves from our primary competitors (Yahoo and Microsoft), similar to AOLs goal to distinguish itself as the leader in online entertainment with their merger with Time Warner. Google is number one in internet search and it would be easy to transfer those competencies to the entertainment field. Acquiring TiVo will allow them to position themselves as number one in several fields of information internet, television, and entertainment. Internet and television, the two largest forms of media, are converging and an increasing number of viewers are interested in technologies which bring them together. By acquiring TiVo, Google has the opportunity to capitalize on significant first-mover advantages and establish itself as the

leader in interactive media. Other companies, such as Microsofts WebTV, have tried to combine internet and TV but have failed. This is most likely due the fact that they are internet companies expanding into an industry of which they have little knowledge. By using TiVos expertise Google can branch into a new market with minimal risk. Google will benefit from TiVos knowledge of producing premium set-top boxes, entering consumers homes through television, and other relevant information Google has been under increasing pressure to maintain growth rates. An acquisition of TiVo would allow it to increase its connection with consumers, and its brand awareness and recognition. Consumers would be exposed to the Google brand every time they turn on their television or access the internet. The financial performances as well as projections of Google are presented below.

Google Financial Performance and Projections

Profit and Loss Statement


2008 Income Statement ($mil) Net Sales Less: Variable Cost of Sales Depreciation Total Cost of Sales Gross Profit Less: Sales Expense G&A Expense Amortization of Intangibles Other expense (income), net Total Sales and G&A Expense Operating Profits (EBIT) Plus: Interest Income Less: Interest Expense Net Profits Before Taxes Less: Taxes Net Profits After Taxes 4,779 2,315 100 2,415 2,364 761 780 32 1 1,574 790 90 700 201 500 2009 4,698 2,286 103 2,389 2,310 786 863 41 5 1,695 615 111 504 131 373 2010 4,596 2,333 81 2,414 2,182 685 868 52 (5) 1,599 583 132 451 62 390 2011 4,670 2,415 75 2,490 2,180 681 908 52 (19) 1,622 558 153 405 55 350

Balance Sheet
2008 Balance Sheet Current Assets Cash Other Operating Assets Total Current Assets Investments Gross Fixed Assets Less: Accum. Depr. & Amort. Net Fixed Assets Other Assets Total Assets Current Liabilities Long-Term Debt Existing Debt New Debt Other Liabilities Total Liabilities Common Stock Retained Earnings Shareholders' Equity Total Liabilities & Shareholders' Equity 2009 2010 2011

695 1,767 2,462 0 939 337 602 852 3,915 1,173 664 144 1,982 728 1,205 1,933 3,915

213 1,845 2,058 (1) 1,159 422 737 1,819 4,613 1,317 984 141 2,442 2,041 130 2,171 4,613

247 1,605 1,852 (0) 1,147 422 725 2,097 4,674 1,565 983 163 2,711 1,923 40 1,963 4,674

232 1,519 1,752 0 1,121 473 648 1,914 4,314 1,502 1,242 166 2,910 1,836 (433) 1,403 4,314

Trend and Projections


Forecast Assumptions 2008 Historical Trend 2009 2010 2011 2012 2013 Projections 2014 2015 2016 Comments Although the historical growth rate is around 2% the Acquirer company feels that with refocus the growth can be increased to 4% Bringing down the Cost of Sales to 50.5% over the next four years will be achieved through (a) reduction of excess mafg. capacity (b) termination of a number of licensing and contractual agreements that is not delivering c. elimination of product lines that did not meet required levels of profitability (d) improvement in supply chain Depreciation as percent of Gross Fixed Assets has been estimated at the average ratio over the historical period. The elimination of underperforming product lines will allow the company to spend sales dollars more effectively. G&A expenses is expected to reduce as a result of a number of efficiency initiatives (a) Closing down of underperforming product lines and retrenchment (b) efficiency improvement in supply chain Acquirer expects to earn an interest of 5% over short term investments The interest on Current Debt is calculated based on the existing interest rates on the debt; The interest rate on future debt will be estimated at the interest rate on Moody's A rated debt as of December 2000. Tax rate in the initial years is low because of the gain in the carry forward of Net Operating Losses made during earlier years To ensure sufficient Current Assets to fund operations a minimum level of 35% for Other Current Operating Assets is included in the forecast. Other Assets is expected to reduce over the years Based on historical ratio of fixed costs to sales To ensure sufficient liquidity a minimum cash balance of 4.5% is included in the forecast. Current liabilities is expected to reduce over the years

Net Sales Growth Rate

-2%

-2%

2%

4.0%

4.0%

4.0%

4.0%

4.0%

Cost of Sales (Variable) / Sales %

48%

49%

51%

52%

52.5%

51.5%

51.0%

50.5%

50.5%

Depreciation & Amortization / Gross Fixed Assets %

11%

9%

7%

7%

8.3%

8.3%

8.3%

8.3%

8.3%

Selling Expenses / Sales (%)

16%

17%

15%

15%

14.5%

14.5%

14.5%

14.5%

14.5%

G&A Expenses / Sales (%) Interest on Cash & Marketable Securities

16% 0%

18% 0%

19% 0%

19% 0%

19.0% 5.0%

18.5% 5.0%

18.0% 5.0%

17.2% 5.0%

16.4% 5.0%

Interest Rate on New Debt (%)

14%

11%

13%

12%

8.3%

8.3%

8.3%

8.3%

8.3%

Marginal Tax Rate

29%

26%

14%

14%

18.0%

22.0%

25.0%

30.0%

37.0%

Other Current Operations Assets / Sales (%) Other Assets / Sales (%) Gross Fixed Assets / Sales (%) Minimum Cash Balance / Sales (%) Current Liabilities / Sales (%)

37% 18% 20% 15% 25%

39% 39% 25% 5% 28%

35% 46% 25% 5% 34%

33% 41% 24% 5% 32%

35.0% 35.0% 25.0% 4.5% 30.0%

35.0% 30.0% 25.0% 4.5% 30.0%

35.0% 25.0% 25.0% 4.5% 28.0%

35.0% 20.0% 25.0% 4.5% 26.0%

35.0% 20.0% 25.0% 4.5% 25.0%

Debt Schedule
Debt Schedule Existing Debt Opening Debt Wieghted Interest Rate Principal Repayment Closing Balance Interest Expense Total Payments (Principal + Interest) Cost of Debt Market Value of Long Term Debt 2012 2013 2014 2015 2016

1,242 1,021 640 589 400 7.50% 7.50% 7.50% 7.50% 7.50% 221.477 380.849 50.939 189.131 50 1,021 84.87 306.35 8.33% 1176.35 640 62.29 443.14 589 46.10 97.03 400 37.09 226.22 350 28.13 78.13

Other Financial Information


Key Valuation Indicators P/E P/S LT Debt/Equity ROI - 5 year avg. ROE - 5 year avg. Stock Price as of 31/3//2011 Current stock price Industry Average 14.5 1.5 50% 12.6% 17.3% Acquirer 17.7 1.3 89% 4.7% 8.1% $ 14.55 $ 16.03

Risk-free Rate Acquirer's Unlevered Beta Acquirer's Target D/(D+E) Ratio Acquirer's Target Tax Rate Acquirer's Levered Beta Market Risk Premium Acquirer's Cost of Debt

5.24% If the firm is a public company, the levered beta may be 1.40 estimated directly. However, if it is a private firm, an 50% Industry Long Term Debt/Equity is 50% 37% 1.84 5.50% 8.33% Moody's A rated bond The analyst in this instance believes the estimated equity does not adequately account for risk that is specific to the 2.00% firm. Therefore 2.0% is added to the cost of equity

Additional Risk Premium

Sustainable Cash Flow Growth Rate after Forecasted Period Total Shares Outstanding

4.00% 426.00

Part B

Tivo the Target

1.0 Introduction

TiVo was developed by Jim Barton and Mike Ramsay through a corporation they named "Teleworld" which was later renamed to TiVo, Inc. Though they originally intended to create a home network device; it was redesigned as a device that records digitized video onto a hard disk. They began the first public trials of the TiVo device and service in late 1998 in the San Francisco Bay Area. 2.0 Tivo DVR A TiVo DVR serves a function similar to a videocassette recorder, in that both allow a television viewer to record programming for viewing at a later time. Unlike a videocassette recorder (VCR), which uses removable magnetic tape cartridges, a TiVo DVR stores television programs on an internal hard drive that can only be removed by disassembling the device? What distinguishes TiVo from other DVRs is the sophisticated software written by TiVo Inc. that automatically records programs not only those the user specifically requests, but also other material in which the user is likely to be interested. TiVo DVRs also implement a patented feature TiVo calls "trick play," allowing the viewer to pause live television and rewind and replay up to a half hour of recently viewed television. More recent TiVo DVRs can be connected to a computer local area network, allowing the TiVo device to download information and even video programs, music and movies from the Internet. 3.0 Functions TiVo polls its network, receiving program information including description, regular and guest actors, directors, genres, whether programs are new or repeats, and whether broadcast is in High Definition (HD). Information is updated daily from Tribune Media Services. Users can select individual programs to record or a "Season Pass" to record an entire season (or more). There are options to record First Run Only, First Run and Repeats, or All Episodes. An episode is considered "First Run" if aired within two weeks of that episode's initial air date. When user's requests for multiple programs are conflicting, the lower priority program in the Season Pass Manager is either not recorded or clipped where times overlap. The lower priority program will be recorded if it is aired later. TiVo DVRs with two tuners record the top two priority programs. TiVo pioneered recording programs based on household viewing habits; this is called TiVo Suggestions. Users can rate programs from three "thumbs up" to three "thumbs down." TiVo user ratings are combined to create a recommendation, based on what TiVo users with similar viewing habits watch. For example, if a user likes American Idol, America's Got Talent and Dancing with the Stars, then another TiVo user who watched just the American Idol might get a recommendation for the other two shows.

A limited amount of space is available to store programs. When the space is full, the oldest programs are deleted to make space for the newer ones; programs that users flag to not be deleted are kept and TiVo Suggestions are always lowest priority. The recording capacity of a TiVo HD DVR can be expanded with an external hard drive, which can add 65 additional hours of HD recording space or up to 600 hours of standard definition video recording capacity. When not recording specific user requests, the current channel is recorded for up to 30 minutes. Dual-tuner models record two channels. This allows users to rewind or pause anything that has been shown in the last thirty minutes useful when viewing is interrupted. Shows already in progress can be entirely recorded if less than 30 minutes have been shown. Unlike VCRs, TiVo can record and play at the same time. A program can be watched from the beginning even if it's in the middle of being recorded, which is something that VCRs cannot do. Some users take advantage of this by waiting 10 to 15 minutes after a program starts (or is replayed from a recording), so that they can fast forward through commercials. In this way, by the end of the recording viewers are caught up with live television. Unlike most DVRs, TiVo DVRs are easily connected to home networks, allowing users to schedule recordings on TiVo's website (via TiVo Central Online), transfer recordings between TiVo units (Multi-Room Viewing (MRV)) or to/from a home computer (TiVoToGo transfers), play music and view photos over the network, and access third-party applications written for TiVo's Home Media Engine (HME) API. TiVo has added a number of broadband features, including integration with Amazon Video on Demand, Jaman.com and Netflix Watch Instantly, offering users access to thousands of movie titles and television shows right from the comfort of their couch. Additionally, broadband connected to TiVo boxes can access digital photos from Picasa Web Albums or Photobucket. Another popular feature is access to Rhapsody music through TiVo, allowing users to listen to virtually any song from their living room. TiVo also teamed up with One True Media to give subscribers a private channel for sharing photos and video with family and friends. They can also access weather, traffic, Fandango movie listings (including ticket purchases), and music through Live365. In the summer of 2008 TiVo announced the availability of YouTube videos on TiVo. 4.0 Subscription The information that a TiVo DVR downloads regarding television schedules, as well as software updates and any other relevant information is available through a monthly service subscription in the United States. A different model applies in Australia where the TiVo media device is bought for a one-off fee, without further subscription costs. There are multiple types of Product Lifetime Service. For satellite enabled TiVo DVRS the lifetime subscription remains as long as the account is active and does not follow a specific piece

of hardware. This satellite lifetime subscription cannot be transferred to another person. Toshiba and Pioneer Tivo DVD recording equipped units include a "Basic Lifetime Subscription", which is very similar to full lifetime, except only three days of the program guide is viewable and search and Internet capabilities are not available, or at least limited. All units (except satellite but including DVD units) are able to have "Product Lifetime Subscription" to the TiVo service which covers the life of the TiVo DV, not the life of the subscriber. The Product Lifetime Subscription accompanies the TiVo DVR in case of ownership transfer. TiVo makes no warranties or representations as to the expected lifetime of the TiVo DVR (aside from the manufacturer's Limited Warranty). In the past TiVo has offered multiple "Trade Up" programs where you could transfer the Product Lifetime Subscription from an old unit to a newer model with a fee. A Tivo can be used without a service agreement, but it will act more like a VCR in that you can only do manual recordings. And the Tivo can't be connected to the Tivo service for time or software updates or changes or Tivo will shut down the recording function. 5.0 Competitors While its former main competitor, ReplayTV, had adopted a commercial-skip feature, TiVo decided to avoid automatic implementation fearing such a move might provoke backlash from the television industry. ReplayTV was sued over this feature as well as the ability to share shows over the Internet, and these lawsuits contributed to the bankruptcy of SONICblue, their owner at the time. Their new owner, DNNA, dropped both features in the final ReplayTV model, the 5500. Other distributors' competing DVR sets include Comcast and Verizon, although both distribute third-party hardware from manufacturers such as Motorola and the former Scientific Atlanta unit of Cisco Systems with this functionality built-in. Verizon uses boxes fitted for FiOS, allowing high-speed Internet access and other features. As of January 2012, TiVo has approximately 2.3 million subscribers. Despite having gained 234,000 subscribers in the last quarter of 2011. This is down from a peak of 4.36 million in January 2010. 6.0 Strategic Directions Tivo has the first mover advantage and started with a lot of optimism. However, soon the competition sets in and Tivo could not attain the growth it has forecasted. The market dynamics have changed in recent times with change in technology and needs of the customer. The convergence of internet and media has changed the way the contents were delivered. Tivo management feels that they need to adapt to the changing market to continue to be in the race. Tivo does not have enough resources in terms of finance and skill to upgrade itself into a web based company. The other significant players in this segment have tied up with web based

companies or in the process of merging with them. Tivo got an initial offer from Google Inc. for acquisition. The Board is considering the acquisition proposal from Google. The financial performance and the projections is presented below.

Tivo Financial Performance and Projections

Profit and Loss Statement


2008 Income Statement ($mil) Net Sales Less: Variable Cost of Sales Depreciation Total Cost of Sales Gross Profit Less: Sales Expense G&A Expense Amortization of Intangibles Other expense (income), net 2) Total Sales and G&A Expense Operating Profits (EBIT) Plus: Interest Income Less: Interest Expense Net Profits Before Taxes Less: Taxes Net Profits After Taxes 42 25 1 26 16 6.30 5.60 0 12 4 0 3 1 2.8 2009 85 49 3 52 33 13 11 1 25 9 0 8 2 6 2010 184 103 5 108 76 28 24 (4) 47 29 2 30 8 22 2011 252 141 9 150 102 38 43 (15) 66 37 4 40 12 29

Balance Sheet
2008 Balance Sheet Current Assets Cash Other Operating Assets Total Current Assets Investments Gross Fixed Assets Less: Accum. Depr. & Amort. Net Fixed Assets Other Assets Total Assets Current Liabilities Long-Term Debt Existing Debt New Debt Other Liabilities Total Liabilities Common Stock Retained Earnings Shareholders' Equity Total Liabilities & Shareholders' Equity Historical Financials 2009 2010 2011

3 12 15 0 4 1 3 26 44 12 6 0 18 22 4 26 44

12 16 29 0 6 2 4 26 59 15 6 0 21 27 11 38 59

97 61 158 (0) 17 5 12 64 233 44 0 1 45 155 32 188 233

43 86 129 0 30 11 19 101 249 42 1 1 45 144 61 205 249

Historical Trend and Projections


Forecast Assumptions 2008 Historical 2009 2010 2011 2012 2013 Projections 2014 2015 2016 Comments During last few years the Target has acquired few companies because of which the growth was high; Initially the growth rate is assumed to be high which is expected to go down to industry growth rate in 5 years Target cost of sales is higher than the Acquirer; Expected to reduce the Cost of Sales by a little margin Depreciation of Gross Fixed Assets has been set at 10% to assume a 10 year depreciation cycle which is standard for most long-lived assets in this industry. Selling expenses will remain flat as a percentage of sales within our model. The Target has experienced some growth in G&A expenses due to acquisition related overhead. In a stable environment we expect overhead to normalize and reduce to 14.1% Target expects to earn an interest of 5% over short term invesments The interest on Current Debt is calculated based on the existing interest rates on the debt; The interest rate on future debt will be estimated at the interest rate on Moody's A rated debt as of December 2000. The tax rate is assumed to increase slightly during the forecast period. Other Current Operations assets are assumed to be maintained at about the average rate of the past years at 30%. Other Assets is expected to reduce over the years Based on historical ratio of fixed costs to sales To ensure sufficient liquidity a minimum cash balance of 6% is included in the forecast. It is higher than Acquirer's requirement Although the current liabilities have reduced in recent years it is kept at 25%; conservative approach

Net Sales Growth Rate

103%

115%

37%

15.0%

15.0%

10.0%

8.0%

5.0%

Cost of Sales (Variable) / Sales %

59%

57%

56%

56%

60.2%

59.7%

59.5%

59.5%

59.5%

Depreciation & Amortization / Gross Fixed Assets % Selling Expenses / Sales (%)

28% 15%

46% 15%

27% 15%

31% 15%

10.0% 15.0%

10.0% 15.0%

10.0% 15.0%

10.0% 15.0%

10.0% 15.0%

G&A Expenses / Sales (%) Interest on Cash & Marketable Securities

13% 0%

13% 0%

13% 2%

17% 9%

14.5% 5.0%

14.5% 5.0%

14.0% 5.0%

14.0% 5.0%

14.0% 5.0%

Interest Rate on New Debt (%) Marginal Tax Rate

7% 19%

7% 23%

0% 27%

0% 29%

7.2% 29.0%

7.2% 29.5%

7.2% 30.0%

7.2% 30.5%

7.2% 31.0%

Other Current Operations Assets / Sales (%) Other Assets / Sales (%) Gross Fixed Assets / Sales (%)

30% 61% 9%

19% 30% 8%

33% 35% 9%

34% 40% 12%

30.0% 35.0% 12.0%

30.0% 30.0% 12.0%

30.0% 25.0% 12.0%

30.0% 20.0% 12.0%

30.0% 20.0% 12.0%

Minimum Cash Balance / Sales (%) Current Liabilities / Sales (%) Common Shares Outstanding (Mil)

6% 28% 6.9

15% 17% 8.5

53% 24% 13.9

17% 17% 19.1

6.0% 25.0% 19.1

6.0% 25.0% 19.1

6.0% 25.0% 19.1

6.0% 25.0% 19.1

6.0% 25.0% 19.1

Debt Schedule
Debt Schedule Existing Debt Opening Debt Wieghted Interest Rate Principal Repayment Closing Balance Interest Expense Total Payments (Principal + Interest) Cost of Debt Market Value of Long Term Debt 2012 1.400 7.75% 0.4 1 0.09 0.49 7.21% $ 1.21 2013 1.000 7.75% 0.4 1 0.06 0.46 2014 0.600 7.75% 0.4 0 0.03 0.43 2015 0.200 7.75% 0.2 0.01 0.21 2016 -

Other Financial Information


Key Valuation Indicators P/E P/S LT Debt/Equity ROI - 5 year avg. ROE - 5 year avg. Stock Price as of 31/3//2011 Current stock price Industry Average 14.5 1.5 50% 12.6% 17.3% Target 6.1 0.7 1% 15.1% 16.2% $ 9.13 $ 14.25

Risk-free Rate

5.24% If the firm is a public company, the levered beta may be estimated directly. However, if it is a private firm, an Industry Long Term Debt/Equity is 50%

Target's Unlevered Beta Target's Target D/(D+E) Ratio Target's Target Tax Rate Target's Levered Beta Market Risk Premium Target's Cost of Debt

1.51 0% 31% 1.51 5.50% 7.21%

Moody's AA rated bond

Sustainable Cash Flow Growth Rate Total Shares Outstanding

4.00% 19.10

Part C

Expected Synergy from the Deal

1.0 Expected Gains from Restructuring and Control Google could see a cross selling opportunity by acquiring Tivo. An acquisition of TiVo would allow it to increase its connection with consumers, and its brand awareness and recognition. Consumers would be exposed to the Google brand every time they turn on their television or access the internet. On a conservative note, Tivos acquisition will help Google increase its revenue by at least 2% every year. Apart from the expected increase in revenue Google plans to close down the Head Office and few other Zonal and Branch Offices of Tivo bring some reduction in redundancies and cost. Google is currently heavily dependent on third parties to supply key elements of its internet infrastructure including bandwidth providers, data centers etc. Acquisition of Tivo will help Google in reducing a part of its dependencies on third part outsourcing. It plans to terminate some of these contracts after acquisition and depend on the in house abilities of Tivo. Google is very keen on retaining the core employees (electronics division working on the product) of Tivo as it does not have the required expertise and skill to manage the products of Tivo. Therefore, Google is planning to offer some additional pay to these core employees so as to retain them. Google have a very strong IT, Marketing and Finance division, therefore, it has planned to retrench some of the employees working in Marketing and Finance division so as to reduce some of the redundancies that would result after acquisition. The details of expected synergy and cost reductions are presented below.

The expected synergy and its value are estimated in the following Tables. The category of expenses is also presented in the Table.

The total annual savings of the closing of the Tivo's Head Office office will be: - Rent - Elimination of 15 back office positions at $35,000 each - Elimination of 10 professional positions at 90,000 each

(In millions) 250,000 525,000 900,000 0.13 0.26 0.45

2012

2013 0.25 0.53 0.90

2014 0.25 0.53 0.90

2015 0.25 0.53 0.90

2016 0.25 0.53 0.90

Expense Category 50% COS/50% Sales Expense G&A 50% COS/50% Sales Expense

As a result of the closure of the Tivo's Head Office Office the following additional expenses will be incurred in 2012: - 3 Months Rent - 1 Month's pay for back office positions - Average 3 months' pay for professional positions 62,500 43,750 225,000

2012 0.06 0.04 0.23

2013

2014

2015

2016

Expense Category 50% COS / 50% Sales Expense Integration Expense Integration Expense

Termination of 3rd Party Equipment Outsourcing agreements

2012 3.00

2013 9.00

2014 12.00

2015 12.00

2016 12.50

Expense Category 100% COS

4)

Termination of rental contracts: Zonal Headquarter

2012 0.50

2013 1.00

2014 1.00

2015 1.00

2016 1.00

50% G&A/25% Sales/25% COS

Branch Office Marketing Office Warehouse Space

0.20 0.40 0.75

0.40 0.80 1.50

0.40 0.80 1.50

0.40 0.80 1.50

0.40 0.80 1.50

50% COS/ 50% Sales 100% Sales 100% Sales

Retrenchment of Employees - 75 employees with average pay of $40,000, including benefits.

2012 1.50

2013 3.00

2014 3.00

2015 3.00

2016 3.00 75% G&A/25%COS

2012 6 Severance pay as a result of terminations 0.37

2013

2014

2015

2016 Integration Expense

2012 7) Retention bonuses for key employees Additional Google Ad revenues from Tivo Customers (assuming that Tivo customers contribute 2% toward future revenue growth of Google revenue from ads) 0.50

2013

2014

2015

2016 Integration Expense

8)

2%

97.13

101.02

105.06

109.26

113.63

Part D

Structuring and Financing the Deal

1.0 Need of the Parties Involved It is crucial to identify the needs of both Google and Tivo. Identifying those needs through careful analysis and discussion facilitates the success of an acquisition because common ground and trust is established between the parties. After thorough examination the following needs of both Google and Tivo are: Google Needs Gogle has been under increasing pressure to maintain growth rates. Acquisition of Tivo will help Google grow. Google has been under increasing pressure to maintain growth rates. Acquisition of Tivo will help Google grow. Convergence of Internet and Media has become the order of the day. Acquisition of Tivo will help Google tap the Media market. Google requires total control over all technologies, patents, R&D and other intellectual property. For that, 100% of the target needs to be acquired. Purchase entire corporation of Tivo not only assets As this is relatively a new business for Google retain key members of Tivo management team and key employees Share not more than 30% of the synergy expected with the Target Tivo Needs Tivo management is passionate about the business; however they dont have enough resources to expand. The management wants to continue with the business provided funds are available. In the changing market dynamics they need technology related to web based integration Key management wants to retain high positions; maximize shareholder value by growing into a large, vertically integrated organization. They also want that their employees should be well compensated. Retrenchment should be as minimum as possible with adequate compensation Obtain as much as premium possible from the Acquirer

After in-depth discussion it is believed than an effective deal structure that satisfies the needs of both Google and Tivo can be formulated. 2.0 Deal Structure Acquisition Vehicle and Post closing Organization TiVo was one of two companies to first offer DVR products. TiVo has invested a large amount of resources to build a strong brand name and brand image. For this reason, Google would maintain the TiVo name after completion of the acquisition. Google would integrate TiVo into its operations by using a corporate structure acquisition vehicle. Since TiVo would

be integrated into Google at the time of acquisition, the post closing organization would be the same as the acquisition vehicle. Form of Acquisition and Payment The form of acquisition would be for Google to purchase all of TiVos outstanding stock. This would allow Google to gain control of all aspects of the company. Purchasing the assets only would be more risky as it creates the possibility that Google will fail to purchase key intellectual property or any other relevant assets provided by TiVo. Purchasing the entire company through TiVos stock also presents risk as it would be assuming the cost TiVo is incurring with the litigation it currently has with EchoStar. However, a Texas jury as already sided with TiVo in the patent dispute and the case is currently in an appeals process where Google feel TiVo will win. Google believes that TiVo is in a good position to win this litigation and defend its valuable patents. In addition there is the possibility of discovering unknown liabilities after the acquisition is completed, but Google expects that its due diligence process will allow it to measure the possibility of this risk and it can account for this during the negotiation process. The most appropriate form of payment for TiVo is a stock-for-stock transaction. There is a possibility of stock dilution but the expectation is that it will be small due to current amount of Googles shares outstanding. Tax Considerations Implementing a Type B stock-for-stock reorganization transaction would be beneficial to the current shareholders of TiVo due to the transactions tax deferred status. This transaction would give TiVo shareholders the ability to defer taxes until the converted shares have been sold. In addition, Google stock has the potential for significant future capital gain. 3.0 Financing of the Deal The TiVo acquisition would have no affect on the creditworthiness of Google. Considering Googles current market capitalization, cash position and expected future earnings, the TiVo acquisition costs would not have a negative effect on Googles financial stability. In addition, Googles financial success has allowed it to fund new projects and acquisitions through retained earnings. Google has not used external funding to finance past acquisitions, but this could change in the future. Google is an extremely successful company. With the projected future growth of Google, net income and revenue will grow at a high rate presenting the opportunity to acquire a company for strategic reasons without significant negative effects on profitability.

Part E

Integration Plan

1.0 Integration Plan Employee Retention An important aspect of the acquisition will be the ability to retain the key TiVo employees. TiVos future viability is based on its ability to create innovative new products and market existing products effectively. This requires skilled managers and employees. It would be detrimental to Google if TiVos key employees left after the acquisition. In order to prevent this from happening, Google must have a retention plan in place before the acquisition is completed. Google would have to create employee contracts with the key managers and employees that would include the length of stay and total compensation. Management Team An integration team consisting of Google managers would meet with the key TiVo managers and employees. The combined team would develop an integration plan to absorb TiVos operations into Googles. The main reason for the acquisition is Googles belief that TiVo will provide additional applications to increase its advertisement revenue. Google will want to review TiVos processes and technological capabilities in order to create new products. After the acquisition, Google will continue to offer TiVos current service, but it will incorporate some of TiVos products into its own services. TiVo Employees When the acquisition proposal is announced, the TiVo employees will want as much information as possible regarding the transaction. The CEO of Google and TiVo should explain the key aspects of the acquisition. The details should include the employee retention plan, the integration plan including completion date, and should strive to meet the expectations of employees. TiVo has approximately 400 employees, so addressing all of the employees should not be a difficult task. Excluding the research and development department, the acquisition will result in the elimination of a significant amount of positions. All executives excluding the Chief Technology Officer and Chief Operating Officer will not be offered positions at Google. All TiVo employees in software research and development will be integrated into Googles research and development department. However, Google will pursue different exit strategies for TiVos hardware business; hence, all employees in hardware research and development will not be retained. Approximately 34% of all employees in the customer service, finance,

human resources, legal and marketing and sales departments will be retained. The employees that are not retained will be given severance pay based on each employees job position and length of service. TiVo Customers and Suppliers TiVo customers will need to be provided with assurances that their service will not be disrupted in any way. TiVo should instruct customers about the short-term and long-term implications of the acquisition. In the short-term TiVo will offer the same service it has provided in the past. In the long-term customers will be provided with new and innovative products and services. Currently, TiVos DVR hardware is produced by third-party manufacturers. TiVo has contracts with companies to manufacture and assemble the DVR. TiVo purchases the components from a variety of vendors, but the three key suppliers are Amtek, Broadcom and Remote Solutions. Amtek provides the chassis for the DVRs, Broadcom supplies the microprocessors and Remote Solutions provides the remote controls. These components are sent to the platform manufacturers and assemblers located in China and Mexico. These suppliers and manufacturers should be notified of the acquisition and how it will not disrupt the current production of DVRs. In the future, as Google incorporates TiVos services with its own, management will reevaluate the viability of the hardware production unit. Exit strategies that will minimize the effect on the hardware line of business will be considered, such as a spin off or divestiture. The decision will depend on interest in the business by potential suitors. Key Integration Activities: Communication Program: CEO Dr. Eric Schmidt to address key issues with employees, customers, and suppliers through regularly scheduled meetings throughout the implementation process. Public Relations with Customers and Suppliers: Focus on customers, stay in contact to make sure their needs are always satisfied. Restructure Advertising Contracts: Allow existing Google advertisers the option to advertise their products through television as well as internet. Staffing Reorganization: Eliminate the majority of TiVo management positions. The CTO and COO executives will be retained as they understand TiVo technology and operations. Product Development Team: Structure team so that Google and TiVo employees play an active part in creating a new product/technology that integrates Google and TiVos strengths. Make sure that the team understands that their goal is creating a product that combines search capabilities with entertainment.

Headquarters Consolidation: Move TiVo employees to Googles Headquarters. The distance between TiVos headquarter and Googles headquarters is a mere 8.4 miles. The potential realized savings from closing the TiVo headquarters is approximately $3,668,000. New Subscriber Campaign: Create hype about new product release to gain additional Google/TiVo subscribers. New Product Release: Release to occur in early May. New product would incorporate Google and TiVos strengths to converge media and technology. The new product would keep the TiVo name but have Google based software upgrades. The test name for the upgrades is currently the Google Package. The new product would link watch consumers watch with Google AdWords. Website Redesign: Redesign Googles Website to reflect its acquisition of TiVo. Redo TiVo website to showcase new product. Create a website for the new product. Exit Hardware Production: Outsourcing to another hardware manufacturer, such as Scientific Atlantic, will allow for significant cost savings.