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Link: https://tech.hindustantimes.com/tech/news/microsoft-to-acquire-nuance-for-19-6-billion-716183 26166729.html (1) Definition of the Problem: summarize the decision to be made a. Who is the decision maker? The decision maker is the board of Microsoft. i. (If applicable) What prompted the decision? Microsoft was looking to acquire an AI company to focus on healthcare and Nuance was a company that they were eying on. b. What are the decision maker’s objectives? The decision maker’s objective was to figure out a valuation for Nuance to see how much Microsoft should acquire them for. The objective of the acquisition was to help Microsft deliver new cloud and AI capabilities across healthcare and other industries. c. What alternatives are being considered? Alternatives are other AI companies that Microsoft can look into acquiring. i. (If applicable) Can new alternatives be discovered? Microsoft can develop its own speech recognition and artificial intelligence technology. ii. (If applicable) Are contingency plans possible? Contingency plans are possible. In the case of Microsoft’s acquisition of Nuance Communications, it is possible that contingency plans were put in place to deal with any unexpected events that may have occurred during the acquisition process. However, the information is not present in the article or on the internet. iii. (If applicable) Do only some of the alternatives merit careful consideration within a model? To determine which alternatives merit careful consideration within a model, Microsoft could evaluate each alternative based on its potential impact on the company’s objectives and constraints. For example, Microsft could consider the impact of acquiring other companies in the healthcare industry or developing its speech recognition and artificial intelligence technology. (2) Developing a Model: how could you explore the relationship between the alternatives and the possible consequences? a. What metrics should be used to evaluate how well each objective will be Met? In this case, Microsoft used DCF (Discounted Free Cash Flow) which is an intrinsic valuation method to assess a company’s value based on the present value of expected future cash flows. Microsoft needs to figure out the valuation of Nuance to find out whether or not it is a

good choice to acquire the company. Microsoft is already eyeing on acquiring Nuance but it needs to find out how much Nuance is worth. Using DCF is a good metric for finding out the value of Nuance compared to the other companies. b. What assumptions might you need to make? There are a lot of factors that go into making a DCF model. We would need to know Nuances’ cash flow today, future cash flows, and future cash flows that are discounted for risk and time, and its terminal value. We would have to make assumptions about the discounted rate used for the model, the terminal value, and its growth patterns. c. What uncertainties must you remain aware of? We are uncertain about the future cash flows. Therefore we have to assess Nuances’ financial statements and how well the company is doing compared to its competitors. Using what we know about the company, Microsoft can make a good prediction of Nuance’s growth patterns. The predictions can then be used for the future cash flow part of the DCF. d. What data is available to inform the model? Nuances’ financial statements are available online. Microsoft can use Nuances’ updated 10k statement to find out about their current cash flow. Information about how well Nuance is doing compared to its competitors can also be found online. For example, there are market research reports on the healthcare industry. We can use this information to make a good prediction of Nuance’s growth patterns for their future cash flows. e. What criteria would you use to evaluate tradeoffs? A DCF is a financial model of evaluating a company in a quantitative way. But, if Microsoft values Nuance because of their employees which is an advantage that Nuance can have, then Microsoft can place a higher value on the qualitative side of Nuance instead of looking at Nuance’s revenue which may not be high. If you give a higher value to the employees of Nuance, that can be a reason to give a higher growth rate for Nuance in the model. f. How would you handle results that turn out to be highly sensitive to your Assumptions? Results that turn out to be highly sensitive to assumptions could be handled by conducting sensitivity analyses to determine the impact of changes in key assumptions such as the discounted rate in the DCF on the results. g. How could you tell whether your model is well aligned with reality? To determine whether the model is well aligned with reality, the model could be tested against historical data on mergers and acquisitions in the healthcare and AI industries. We can compare Nuance with other companies in the same industry to see if we assigned them with a fair growth rate and discounted rate in the model.

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