In November 2019, Alphabet (Google) announced that it had entered into an agreement to acquire Fitbit Inc (FIT) for $7.35 per share or roughly $2,100 million. Fitbit has sold more than 100 million devices, supporting over 29 million active users globally. Growth in wearabes is anticipated to be 6.0% per annum through 2025. In 2019, despite revenues exceeding $1.4 billion, Fitbit generated negative cash flows. With Alphabet's resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and improve efficiencies. Alphabet therefore expects cash flows to be a modest $35 million in the following year (i.e. CF1). Google's cost of capital is 8.0%. 1. Based on the data provided above, what is the present value of the acquisition? Do you agree with Google's decision to acquire Fitbit? Why? (show calculations; 10 points) 2. Using the exhibit below, assess the performance of Fitbit. Does this change your decision to acquire? (support answer with financial ratios; 10 points) 3. Based on our case study, what other initiative(s) should Alphabet implement to address its main challenge(s)? Briefly describe. (10 points) Figues in 5000 2019 2018 2017 2016 2015 Revenue Cost of revenue Gross profit 1,434,788 1,511,983 1,615,519 2,169,461 1,857,998 1,007,116 908,404 924,618 1.323.577 956.935 427,672 603,579 690,901 845,884 901,063 R&D expense 300,354 332,169 343,012 320,191 150,035 Figues in S000s 2019 2018 2017 2016 2015 Revenue Cost of revenue Gross profit 1,434,788 1,511,983 1,615,519 2,169,461 1,857,998 1,007,116 908,404 924,618 1,323,577 956,935 427,672 603,579 690,901 845,884 901,063 R&D expense Sales & marketing General & administrative Change in consideration 300,354 329,800 118,231 332,169 344,091 116,627 343,012 415,042 133,934 320,191 491,255 146,903 150,035 332,741 77,793 (7,704) Operating income (320,713) (189,308) (201,087) (112,465) 348,198 Other income, net Income tax expense 11,648 11,646 5,166 1,687 6,443 82,548 3,170 (6,518) (60,249) 112,272 Net income (320,711) (185,829) (277,192) (102,777) 175,677 Total current assets PPE, net Other assets Total Assets 1,119,752 1,311,811 1,384,365 1,480,571 1,355,414 82,756 106,286 104,908 76,553 44,501 165,578 97,450 92,802 264,802 119.151 1,368,086 1,515,547 1,582,075 1,821,926 1,519,066 Total current liabilities Other liabilities Total Liabilities 764,610 116,213 880,823 719,383 60,226 779,609 701,300 56,812 758,112 756,340 67,054 823,394 508,257 29.358 537,615 Shareholders' equity 487,263 735,938 823,963 998,532 981,451
