Analyzing Cross-Border Acquisitions in the Global Financial Market

This report provides a comprehensive analysis of a cross-country acquisition in the global financial market, focusing on Microsoft's acquisition of LinkedIn. It examines the reasons behind the acquisition, including LinkedIn's extensive member base and the potential for enhanced productivity. The report evaluates risks such as foreign exchange fluctuations and differing legal systems, while also highlighting advantages like building a skilled workforce and increasing market share. A discounted cash flow (DCF) analysis is conducted to value LinkedIn, and the report touches upon event analysis to test the efficient market hypothesis (EMH). It also briefly mentions trading strategies to exploit price inefficiencies during the acquisition process, ultimately aiming to provide a thorough understanding of the financial implications and strategic considerations of the acquisition.

Global Financial

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Stating the reasons behind acquisition of target company and reflection of chronicle events....3
TASK 2............................................................................................................................................5
Evaluating the risk and return as well as advantages of international acquisition to the
acquiring company.......................................................................................................................5
TASK 3............................................................................................................................................6
Conducting comprehensive valuation on target company...........................................................6
TASK4...........................................................................................................................................10
Conducting event analysis to test efficient market hypothesis (EMH).....................................10
TASK 5..........................................................................................................................................10
Stating trading strategy which in turn helps in exploiting price inefficiency during the
acquisition process.....................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Global financial system is highly concerned with the meeting of investment and trade
financing purpose. In addition to this, global financial aspect lays high level of emphasis on
doing cross country transactions which in turn helps organizations in meeting their goals and
objectives. Moreover, with the motive to maximize productivity and profitability as well as
exploring the business operations firm focuses on undertaking acquisition strategy. Hence,
acquisition strategy is highly significant which in turn provides assistance to the firm in getting
the benefits of high economies of scale. The present report is based on Microsoft which is the
leading multinational technology whose headquarter situated on Washington. Such business unit
manufactures and sells software, customer electrical, personal computers and services. In this,
report will present the chronicle events which are related to the acquisition done by Microsoft.
Besides this, it will also shed light on the risk, return, EMH and trading strategy which is
associated with the acquisition process.
TASK 1
Stating the reasons behind acquisition of target company and reflection of chronicle events
In order to acquire Lined in, Microsoft paid $26.2 billion which is considered as one of
the largest acquisition. Moreover, for acquiring social sites such as LinkedIn huge price or
amount was paid by Microsoft. There are several reasons due to which Microsoft laid high level
of emphasis on acquiring LinkedIn are as follows:
 LinkedIn has 433 million members and 2 million paid subscribers which in turn clearly
shows that management base of firm was highly sound. Besides this, Microsoft is also
enjoying high customer base such as more than 1.2 billion office users. However, firm
has no social graph it has to rely on Facebook, LinkedIn and other sources for providing
key connections (Microsoft Pays $26 Billion for LinkedIn in Biggest Deal Yet, 2017).
Thus, with the motive to get benefits from solid social graph and access to 433 million
people Microsoft has taken decision in relation to acquiring LinkedIn.
 Further, outcome or results of research shows that people are highly loyal towards the
services which are offered by LinkedIn. Articles based on it clearly show that large

number of kids plays Minecraft on LinkedIn. Along with this, US adults also use
LinkedIn with the aim to find suitable jobs and developing as well as maintaining
effectual connection with the colleague (10 things you should know about the Microsoft-
LinkedIn $26.2 bn deal, 2017). Thus, for developing relations with the more people
Microsoft decided to acquire LinkedIn.
Hence, it can be stated that to track new opportunities and for gaining competitive edge
over others Microsoft acquired LinkedIn. Enhancement of productivity and profitability is
one o the main motives which in turn encouraged Microsoft to acquire LinkedIn. Moreover,
in the case of acquisition, there is high level of possibility that user of LinkedIn would be the
prospective customers of product or services offered by Microsoft. This aspect clearly shows
that such acquisition will prove to be more beneficial for Microsoft.
By doing investigation, it has been found that after getting approval from European
Commission Microsoft announced that it will acquire LinkedIn by investing $26.2 billion.
Deal was made by Microsoft with LinkedIn by doing all cash related transaction @ $196 per
share with the premium of 49.5%. In addition to this, on the date of acquisition it was
decided that Jeff Weiner will remain the CEO of LinkedIn. However, he is obliged to report
all the aspects to the CEO of Microsoft namely Satya Nadella. In addition to this, all the
transactions were financed by through the issuance of new debt. Further, LinkedIn will
retain its distinct brand, culture and independence after acquisition process. At the date of
acquisition all such announcements have been made Microsoft.

TASK 2
Evaluating the risk and return as well as advantages of international acquisition to the acquiring
company
In the case of global acquisition, business entity faces several risks which in turn places
direct impact on its success and execution of planning are as follows:
 Foreign exchange risk: In the recent times, high level of fluctuation takes place in the
foreign exchange market. Thus, it is the major risk which has greater and high level of
impact on the position as well as performance of firm (Cashin, Mohaddes and Raissi,
2017). From assessment, it has been found that foreign exchange risk is high when
foreign subsidiary company records or maintains final accounts in other currency as
compared to acquiring firm. Hence, if adverse movements take place in currency until the
transaction is not completed then it negatively influences the financial strategy and
position of acquiring company.
 Foreign legal system: Laws, legislation and legal framework are highly varied from one
country to another. Thus, for attaining success acquiring company is highly required to
comply with the regulatory aspects (Banerjee, Devereux and Lombardo, 2016). In the
case of failure regarding such aspect brand image of firm is highly affected in a negative
manner.
Return or Advantages: In the case of acquisition, acquiring company gets and enjoys
numerous benefits in terms of both financial and non-financial. In the present case or study,
Time Dotcom has acquired Thailand’s Symphony with the aim to get several advantages are as
follows:
 Building of highly skilled and talented workforce: By acquiring company with good
management and process system Time Dotcom can build highly skilled and competent
workforce. Moreover, talented personnel are the prior requirement for the attainment of
organizational growth and success (Reconsidered and et.al., 2016). From assessment, it
has been identified that management staff of Linked in has better understanding about
people rather than Microsoft. Hence, by developing the pool of skilled personnel firm can
get the desired level of outcome or success.

 Incline in customer base and market share: Acquisition is one of the most effectual
strategies which in turn enable acquiring company to enhance customer base and thereby
market share (Or and Aranda‐Jan, 2017). Thus, by using the distribution channel and
system of Linked-in for own use business entity of Microsoft can attain goals and
objectives.
 Diversification: Linked-in refers to the sites which provide information to job seekers
about vacant position. On the other side, Microsoft deals in the manufacturing aspect of
software (Tong, 2016). Hence, by acquiring Liked-in Microsoft has diversified its
business operations and functions to a great extent. Thus, by acquiring the company of
other sectors business entity can diversify business activities and functions.
 Reducing cost and overhead: Cost and overhead expenses can also be reduced by
business entity through the means of acquisition. Moreover, when business unit operates
at large level then it may result into high economies of scale (Horowitz, 2014). In this
way, acquisition strategy helps in minimizing the expenses and thereby cost level.
TASK 3
Conducting comprehensive valuation on target company
In order to conduct comprehensive evaluation of target company such as LinkedIn
discounted cash flow (DCF) analysis has been performed. Such method of analysis or valuation
is highly effective which in turn helps in evaluating or estimating the attractiveness of an
investment opportunity in the best possible way. Such analysis method lays high level of
emphasis on undertaking future value of free cash flow projections (Valdez and Molyneux,
2015). By discounting all such cash flows analysts determine present value which in turn
provides high level of assistance in evaluating the potential for investment significantly. Besides
this, such method offers solution by taking into account the time value of money concept. In the
recent times, due to the volatile nature of market, value of money changes more frequently. In
this, time value of money concept helps in making proper estimation of future value.
Discounted cash flow analysis of LinkedIn
Particulars
20
11
20
12
20
13
20
14
20
15 2016 2017 2018 2019

Revenue
52
2
97
2
15
29
22
19
29
91
3047.
829
3120.97
69
3208.36
425
3311.03
191
Cost
Cost of material 81
12
6
20
3
29
4
41
9 427 437 449 464
Gross profit
44
1
84
6
13
26
19
25
25
72 2621 2684 2759 2847
Operating expenses
R&D
13
2
25
7
39
6
53
6
77
6 791 810 832 859
sales, general and
administration expenses
24
0
45
3
74
8
11
16
15
27 1556 1593 1638 1690
Other operating expenses 43 80
13
5
23
7
42
0 428 438 451 465
total operating expenses
41
5
79
0
12
79
18
89
27
23 2775 2841 2921 3014
Operating income 26 56 47 36
-
15
1 -154
-
157.561
86
-
161.973
59
-
167.156
74
Interest expenses 7 51 52 53 55 56
Other expenses or income -3 1 2 -13 -13 -14 -14 -14
Income before taxation 23 57 49 31
-
21
5
Provision for income tax 11 36 22 47 -50
Net profit or FCF 12 22 27 -15
-
16
5
3047.
829
3120.97
7
3208.36
42
3311.03
19
The above depicted table shows that sales revenue of LinkedIn inclined from £522 m to
£2991 m at the end of 2015. Besides this, from evaluation it has been assessed that along with
this sales, gross margin of LinkedIn increased from £441m to £2572m in 2016. It shows that
both sales and profit variable is positively correlated. In addition to this, it has been found that
operating income of LinkedIn was negative during the period of 2014 and 2015 such as £-151 &
-£154 respectively. Tabular presentation shows that operating income of LinkedIn will be
negative. This is not a good indicator but firm can enhance operating margin by making control
over expenses. Besides this, from evaluation it has been identified that net profit margin of
LinkedIn would be £3311.03 m in the year of 2019. This in turn shows that Microsoft will
generate positive margin from such deal.
Cost sheet 2011 2012 2013 2014 2015 2016 2017 2018 2019

Cost of material
15.5
2%
12.9
6%
13.2
8%
13.2
5%
14.0
1%
14.01
%
14.01
%
14.01
%
14.01
%
R&D
25.2
9%
26.4
4%
25.9
0%
24.1
6%
25.9
4%
25.94
%
25.94
%
25.94
%
25.94
%
sales, general and
administration expenses
45.9
8%
46.6
0%
48.9
2%
50.2
9%
51.0
5%
51.05
%
51.05
%
51.05
%
51.05
%
Other operating expenses
8.24
%
8.23
%
8.83
%
10.6
8%
14.0
4%
14.04
%
14.04
%
14.04
%
14.04
%
total operating expenses
79.5
0%
81.2
8%
83.6
5%
85.1
3%
91.0
4%
91.04
%
91.04
%
91.04
%
91.04
%
Operating income
4.98
%
5.76
%
3.07
%
1.62
%
-
5.05
%
-
5.05
%
-
5.05
%
-
5.05
%
-
5.05
%
Interest expenses
0.00
%
0.00
%
0.00
%
0.32
%
1.71
%
1.71
%
1.71
%
1.71
%
1.71
%
Other expenses or income
-
0.57
%
0.00
%
0.07
%
0.09
%
-
0.43
%
-
0.43
%
-
0.43
%
-
0.43
%
-
0.43
%
Total expenses
-
0.57
%
0.00
%
0.07
%
0.41
%
1.27
%
0.00
%
0.00
%
0.00
%
0.00
%
Income before taxation
5.56
%
5.76
%
3.01
%
1.22
%
-
6.32
%
0.00
%
0.00
%
0.00
%
0.00
%
Provision for income tax
2.11
%
3.70
%
1.44
%
2.12
%
-
1.67
%
0.00
%
0.00
%
0.00
%
0.00
%
Net profit or FCF
3.45
%
2.06
%
1.57
%
-
0.90
%
-
4.65
%
100.0
0%
100.0
0%
100.0
0%
100.0
0%
With the motive to get suitable view of financial aspects analysts has made evaluation of
all the elements of income statement in against to sales revenue. This in turn provides deeper
insight about the area of expenses which require high control. Hence, by making evaluation of all
such aspects business entity of Microsoft would become able to set highly competent framework
that aid in the profit margin of firm. The above depicted cost sheet clearly presents that material
expenses of LinkedIn accounts for 14.01% which is neither too high nor too lower.
Further, in 2015, R&D expense percentage in relation to sales account for 25.94%. Cost
sheet clearly entails that sales and general administration expenses of LinkedIn accounts for
51.05% in the year of 2015. Along with this, it has been found that level of other operating
expenses were lower such as 14.04%. Hence, it can be presented that due to having higher sales,

general and administration expenses LinkedIn failed to generate positive operating profit or
margin (Annual report of LinkedIn, 2015). Hence, by taking into account such aspect or analysis
Microsoft would become able to develop sound framework. In addition to this, level of firm’s
interest level or expenses is moderate. Thus, it is suggested to the firm to place high level of
emphasis on making continuous monitoring of expense level such as sales and general
administration etc (Banerjee, Devereux and Lombardo, 2016). By doing this, Microsoft would
become able to achieve success in the strategic business environment.
PV at 6% WACC
Present year 1 2 3 4 5
Discounting factor 0.943 0.890 0.840 0.792 0.747
PV of cash flows
-
131.13
2712.55
7
2620.43
2
2541.32
5
2474.195
7
Terminal Value
Sum of PV of FCF for explicit forecast 10,217
WACC 6.00%
Long term growth in Revenues 320%
Present Value of terminal value (589)
Terminal Value as % of Total Value -6%
Equity Value
Enterprise
Value 9,629
- Debt 201,128
+ Cash 546,237
Net Debt 747,365

Equity Value 756,994
Intrinsic
Value
Equity
Value 756,994
Diluted
Shares 120,000
Intrinsic
Value 6
The above depicted evaluation shows that equity and intrinsic value accounts for 756994
and 6 respectively. By considering the time value of money concept it can be stated that such
potential investment will offer high level of benefit to Microsoft.
TASK4
Conducting event analysis to test efficient market hypothesis (EMH)
TASK 5
Stating trading strategy which in turn helps in exploiting price inefficiency during the acquisition
process
Market or price inefficiency implies for the situation when not enough information is
available regarding demand and supply aspect. In this, it is highly difficult for the business entity
to make proper estimation of regarding the happening of business environment (Moffett,
Stonehill, and Eiteman, 2014). In this, by conducting financial analysis acquiring company such
as Microsoft can get deeper insight about the extent to which specific deal is profitable or not.
Hence, it can be stated that financial analysis or evaluation is the best strategy which in turn
helps acquiring company such as Microsoft in exploiting price inefficiency to a great extent. In

addition to this, it is suggested to Microsoft to lay emphasis on doing continuous monitoring of
business performance and aspect. By doing this, Microsoft would become able to frame suitable
trading strategy.
CONCLUSION
By summing up this report, it has been concluded that several announcements were made
by the owner of Microsoft at the time of global acquisition. It can be revealed from the report
that business entity who has undertaken decision in relation to acquiring another company should
consider every aspect such as risk and return. Besides this, it can be inferred that parent company
such as Microsoft should consider foreign exchange, legal risk at the time of making decision
about acquisition. Along with this, it has been articulated that by using suitable valuation
technique Microsoft can evaluate the attractiveness of potential investment. It can be
summarized from the report that by developing highly suitable trading strategy Microsoft would
become able to exploit market inefficiency to a great extent.

REFERENCES
Books and Journals
Banerjee, R., Devereux, M. B. and Lombardo, G., 2016. Self-oriented monetary policy, global
financial markets and excess volatility of international capital flows. Journal of
International Money and Finance 68. pp.275-297.
Banerjee, R., Devereux, M. B. and Lombardo, G., 2016. Self-oriented monetary policy, global
financial markets and excess volatility of international capital flows. Journal of
International Money and Finance. 68. pp.275-297.
Cashin, P., Mohaddes, K. and Raissi, M., 2017. China's slowdown and global financial market
volatility: Is world growth losing out?. Emerging Markets Review. 31. pp.164-175.
Horowitz, N., 2014. Art of the deal: Contemporary art in a global financial market. Princeton
University Press.
Moffett, M. H., Stonehill, A. I. and Eiteman, D. K., 2014. Fundamentals of multinational
finance. Pearson.
Or, N. H. and Aranda‐Jan, A. C., 2017. The Dynamic Role of State and Nonstate Actors:
Governance after Global Financial Crisis. Policy Studies Journal. 45(S1).
Reconsidered, C. and et.al., 2016. I nternational policy coordination has played a major role in
the global policy response to the Great Recession, with a particular focus in the early years
on the worldwide joint implementation of fiscal stimulus mea-sures, 1 and more recently on
the worldwide implementation of harmo-nized financial market regulations (for example,
Basel III), which have an. Managing Complexity: Economic Policy Cooperation after the
Crisis. p.77.
Tong, E., 2016. Global financial instability: Why US monetary policy matters. University of
Auckland Business Review. 19(1). p.6.