If EMC’s estimated opportunity cost of funds is 9 percent, as an analyst, how would you view the acquisition?

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? Would your conclusion change if you knew that EMC had credible information that the economy was on the verge of an expansion period that would boost VMWare’s projected annual growth rate to 4 percent for the foreseeable future? Explain.

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