Download Syllabus

Course Title: FBE 460: MERGERS, ACQUISITIONS AND
RESTRUCTURING
Syllabus for Spring 2014
Professor: Lloyd Levitin
Office:
Acc. 301E
Office Phone: 310-740-6524
E-mail: [email protected]
TA: Michael Haddad ([email protected])
Lecture Class
Monday and Wednesday 4:00 – 5:50 P.M.
Room: ACC 303
Teaching Assistant:
Eugene Lee ([email protected])
Office Hours
Mondays
Tuesdays
Wednesdays
Thursdays
2:45 – 3:45 P.M.
2:45 – 3:15 P.M.
2:45 – 3:45 P.M.
5:15 – 5:45 P.M.
Course Objective
The primary objective of the course is to provide a practical understanding of the major strategic,
economic, financial, human resources, and governance issues of mergers, acquisitions, and
restructuring. The course is suitable for any Marshall undergraduate who desires a basic
knowledge of M&A transactions in order to do effective work in a wide range of fields,
including corporate development, corporate finance, investment banking, and consulting. The
course is most suitable for students considering careers in finance.
Learning Objectives
This course will help you to:
 understand the role that M&A plays in the contemporary global market, and its use as a
strategic tool to provide growth, enhance competitive position, transform a company or
industry, and create shareholder value.
 develop a framework that can be used for analyzing M&A transactions including understanding
strategic rationale, valuation methodologies, deal structures, bidding strategies, and the need for
a value proposition.
 know how M&A can be used successfully as well as its pitfalls, dangers and risks.
 foster an understanding of the M&A process from target selection to doing the deal (including
due diligence, integration planning, negotiating the agreement, announcing the deal), to closing
and integration.
 recognize the advantages and disadvantages of alternative deal structures.
 have an understanding of commonly used takeover tactics and defenses.
 choose a path for restructuring that will meet corporate goals and create shareholder value.
 understand the practical limitations of the various valuation approaches.
 minimize the risk that a merger or acquisition will not meet expectations.
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Learning Objectives, continued
 know when alliances or joint ventures are preferable alternatives to mergers and acquisitions.
 understand how value is created (or destroyed) as result of corporate mergers,
acquisitions, and restructuring transactions.
 Understand the role played by corporate boards and third parties (consultants, investment
bankers, analysts, and institutional investors) in M&A deals
Who Should Take This Course
Those who are seeking to become entrepreneurs, financial analysts, chief financial officers, operating
managers, investment bankers, business brokers, portfolio managers, investors, corporate development
managers, strategic planning managers, auditors, venture capitalists, business appraisers, consultants,
or who simply have an interest in the subject.
Prerequisite
BUAD 215 or BUAD 306
Required Materials
Mergers, Acquisitions and Other Restructuring Activities by Donald M. DePamphilis,
(Academic Press, 7th edition, 2014).
Course packet containing 9 cases available at the bookstore.
Course Notes: Copies of lecture slides and other class information are available through your
Blackboard account.
Student’s Companion Site
This site can be accessed by using the link: http://booksite.elsevier.com/9780123854872 . Contents of
the companion website are set forth on pages xv-xvii in the text.
Teaching Methods
This course is taught through a combination of readings, cases and lectures. We begin each session
with a discussion of current events. You are encouraged to visit dealbook.nytimes.com before each
class to obtain a grasp of recent news.
About the Instructor
Lloyd Levitin is a Professor of Clinical Finance and Business Economics at Marshall. He was
Executive Vice President and CFO of Pacific Enterprises from 1982-1995 (now Sempra Energy), and
was actively involved in the firm’s diversification program which included numerous acquisitions. He
testified as an expert on utility diversification to the Senate Finance Committee of the U.S. Congress
and has been a consultant for JurEcon, Inc., a nationwide consulting and research firm for management
and counsel. He has a MBA from Wharton and a JD from University of San Francisco. He practiced
as a CPA after receiving his MBA, and as a tax attorney after receiving his JD.
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Grading Summary:
TESTS
Mid-Term
Final Exam
CASE WRITE-UP: BCE INC.: IN PLAY (group project)
PEER EVALUATION ON GROUP PROJECT
CLASS PARTICIPATION
TOTAL
Points
% of Grade
25
35
25.0%
35.0%
12
12.0%
8
8.0%
20
20.0%
100
100.0%
Final grades represent how you perform in the class relative to other students. Your grade will
not be based on a mandated target, but on your performance. Three items are considered when
assigning final grades:
1. Your average weighted score as a percentage of the available points for all assignments (the
points you receive divided by the number of points possible).
2. The overall average percentage score within the class.
3. Your ranking among all students in the class.
Midterm and Final Exam (Midterm 25% of your grade; Final 35% of your grade)
The midterm and final exam will be closed-book, closed-notes. The final exam is cumulative
from the beginning of the course. Laptops or any hand-held device with email capabilities
cannot be used. You should bring a calculator to perform calculations.
Case Write-Up (12% of your grade)
There are 9 real world change of control case studies contained in the course packet. They
involve 6 different actual M&A deals. (One M&A deal is divided into 4 different cases). Only 1
case – BCE Inc.: In Play – is to be handed in and graded. The questions you are to answer are
contained on page 12 of this syllabus. This is a group project; your group cannot include more
than 6 students. This project will count 12% of your grade.
Peer Evaluation on Group Project (8% of your grade)
Study groups provide a valuable learning experience – how to work effectively and efficiently in
groups (a common practice in Corporate America), learning from others, and sharpening a
student’s ability to communicate with others. However, human nature being what it is, some
students are tempted to relax and let others carry their load. In order to provide an incentive for
all students to make maximum contributions to the team project, students will be asked to grade
each team member’s contributions on a 1 to 8-point scale (8 representing the best performance).
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This evaluation is to be submitted by email to the Instructor before the last day of classes. Any
team member who does not email his (her) evaluation of team members will be deemed to have
given a 10-point score to each member of the team.
Class Participation (20% of your grade).
Attendance and participation are essential for success in this course. The CLASS SCHEDULE
AND ASSIGNMENTS are set forth on pages 7 to 8 in this syllabus. There are 7 cases assigned.
Only one is to be handed in (Case #7: BCE Inc.: In Play). The other cases will be discussed in
class.
You may earn up to 20 points for class participation (i.e., 20% of your final grade). Each of you
will be awarded these 20 points on the first day of class. Your objective will be to keep these 20
points throughout the semester. This requires attendance at classes and your participation in the
discussion of the 6 cases that are not handed in. The questions for each of these cases are set
forth on pages 9 to 11 of this syllabus. The answers that I am looking for to these questions are
qualitative; extensive computations and/or spreadsheets are not required. I will cold-call to ask
you to discuss one of the assigned questions, or additional ones pertaining to the case, and if it
appears to me that you did not prepare for the case discussion, I will subtract one or two points
from the 20 maximum. You may collaborate and discuss these cases with other students in the
class. However, each student must have the necessary understanding of the case study to answer
the questions in class.
To help me out, you should bring a name card and place it on the desk in front of you. After the
enrollment in the course has stabilized, I will pass around a seating chart. At that point, I ask that
you remain in that seat for the rest of the semester. This will help assure that class participation
is accurately recorded and rewarded.
Academic Integrity
USC seeks to maintain an optimal learning environment. General principles of academic honesty
include the concept of respect for the intellectual property of others, the expectation that
individual work will be submitted unless otherwise allowed by an instructor, and the obligations
both to protect one’s own academic work from misuse by others as well as to avoid using
another’s work as one’s own. All students are expected to understand and abide by these
principles. SCampus, the Student Guidebook, (www.usc.edu/scampus or http://scampus.usc.edu)
contains the University Student Conduct Code (see University Governance, Section 11.00),
while the recommended sanctions are located in Appendix A.
Students will be referred to the Office of Student Judicial Affairs and Community Standards for
further review, should there be any suspicion of academic dishonesty. The Review process can
be found at: http://www.usc.edu/student-affairs/SJACS/ . Failure to adhere to the academic
conduct standards set forth by these guidelines and our programs will not be tolerated by the
USC Marshall community and can lead to dismissal.
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Student Disability
Any student requesting academic accommodations based on a disability is required to register with
Disability Services and Programs (DSP) each semester. A letter of verification for approved
accommodations can be obtained from DSP. Please be sure the letter is delivered to be as early in
the semester as possible. DSP is located in STU 301 and is open 8:30 AM to 5:00 PM, Monday
through Friday. The phone number for DSP is (213) 740-0776. For more information visit
www.usc.edu/disability.
Technology Policy
Laptop and Internet usage is not permitted during academic or professional sessions unless
otherwise stated by the professor. Use of other personal communication devices, such as cell
phones, is considered unprofessional and is not permitted during academic or professional
sessions. ANY e-devices (cell phones, PDAs, iPhones, Blackberries, other texting devices,
laptops, iPods) must be completely turned off during class time. Videotaping faculty lectures is
not permitted, due to copyright infringement regulations. Audiotaping may be permitted if
approved by the professor. Use of any recorded material is reserved exclusively for USC
students registered in this class.
Retention of Graded Coursework
Final exams and all other graded work which affected the course grade will be retained for one
year after the end of the course if the graded work has not been returned to the student (i.e., if I
returned a graded paper to you, it is your responsibility to file it, not mine).
Class Notes Policy
Notes or recordings made by students based on a university class or lecture may only be made
for purposes of individual or group study, or for other non-commercial purposes that reasonably
arise from the student’s membership in the class or attendance at the university. This restriction
also applies to any information distributed, disseminated or in any way displayed for use in
relationship to the class, whether obtained in class, via email or otherwise on the Internet, or via
any other medium. Actions in violation of this policy constitute a violation of the Student
Conduct Code, and may subject an individual or entity to university discipline and/or legal
proceedings.
Emergency Preparedness/Course Continuity
In case of a declared emergency if travel to campus is not feasible, USC executive leadership
will announce an electronic way for instructors to teach students in their residence halls or homes
using a combination of Blackboard, teleconferencing, and other technologies.
Please activate your course in Blackboard with access to the course syllabus. Whether or not you
use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard
learning management system and support information is available at blackboard.usc.edu.
Classes Cancelled
Classes scheduled for April 16 and April 21 are cancelled. Make-up classes will be scheduled at
the beginning of the semester. These make-up classes will be videotaped for those students
unable to attend and posted to Blackboard.
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MARSHALL GUIDELINES
Learning Goals: In this class, emphasis will be placed on the USC Marshall
School of Business learning goals as follows:
Goal
1
Description
Our graduates will understand types of markets and
key business areas and their interaction to effectively
manage different types of enterprises
Course
Emphasis
Moderate
2
Our graduates will develop a global business
perspective. They will understand how local, regional,
and international markets, and economic, social and
cultural issues impact business decisions so as to
anticipate new opportunities in any marketplace
Moderate
3
Our graduates will demonstrate critical thinking skills
so as to become future-oriented decision makers,
problem solvers and innovators
High
4
Our graduates will develop people and leadership
skills to promote their effectiveness as business
managers and leaders.
Moderate
5
Our graduates will demonstrate ethical reasoning
skills, understand social, civic, and professional
responsibilities and aspire to add value to society
High
6
Our graduates will be effective communicators to
facilitate information flow in organizational, social,
and intercultural contexts.
Moderate
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CLASS SCHEDULE AND ASSIGNMENTS: FBE 460
SECTION
DATE TOPIC
ASSIGNMENT
I. M&A Environment Jan 13
Introduction
Text: Chapter 1: P. 21-33
Jan 15
Regulatory Environment
Jan 20
HOLIDAY
Jan 22
Causes of Merger Failure
Case #1: WORLDCOM
II. Corporate
Takeover Market
Jan 27
Alternative Takeover
Tactics and Takeover
Defenses
Text: Chapter 3; Case Study
3.2: Airgas Aborted Takeover
of Airgas (P. 110)
III. M&A Process
Jan 29
Acquisition Planning and
Implementation
Text: Chapter 4
Feb 3
Acquisition Planning and
Implementation, continued
Text: Chapter 5
Feb 5
Acquisition Planning and
Implementation, continued
Case #2: Cadbury
Schweppes: A and B cases
Feb 10
Integration
Text: Chapter 6
Feb 12
DCF Valuation
Text: Chapter 7: P. 217-230
Feb 17
HOLIDAY
Feb 19
Market and Transaction
Multiples
Text: Chapter 8: P. 259-268;
272-274, 289
Feb 24
Application of Valuation
Methodologies
Text: Chapter 9
Feb 26
Analysis of a Major
Acquisition: Strategy, Bid
Process, Post-merger
Integration
Case #3: Cadbury
Schweppes: C and D cases
Mar 3
MIDTERM
Based on Chapters 1-9,
inclusive
Mar 5
Valuation of Private Firms
Text: Chapter 10
Mar 10
Analysis of HewlettPackard-Compaq Merger
Case #4: Hewlett-PackardCompaq Merger
IV. Valuation of M&A
Deals
Text: Chapter 2
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CLASS SCHEDULE AND ASSIGNMENTS: FBE 460, continued
SECTION
DATE TOPIC
ASSIGNMENT
V. Deal Structuring
Mar 12 Introduction to Deal
Text: Chapter 11
and Financing
Structuring
Strategies
Mar 17
-22
Spring
Recess


Mar 24
Deal Structuring – Tax and
Accounting Issues
Mar 26
Deal Structuring – Tax and
Accounting Issues,
continued
Mar 31
Debt Structuring –
Financing The Deal
Apr 2
Deal Structuring –
Shareholder Voting, Risk
Management, Social
Issues, Putting It All
Together
Apr 7
Analysis of Proctor &
Gamble Case
Case #5: Proctor & Gamble
Acquisition of Gillette
Apr 9
Highly Levered
Transactions
Analysis of American
Cyanamid Cases
Text: Chapter 14
Apr 14
Text: Chapter 12
Text: Chapter 13
Case #6: American Cyanamid
(A) and (B) Cases Combined
VI. M&A Alternatives
Apr 16
Business Alliances
Text: Chapter 15
VII. Restructuring for
Going Concerns
Apr 21
Restructuring Strategies
Text: Chapter 16
VIII. Review
Apr 23
Analysis of BCE Case
Case #7: BCE Inc.: In Play
Apr 28
Course Review
Apr 30
Course Review
May 7
4:30-6:30 P.M.
Final Exam
Cumulative
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Case #1: WORLDCOM INC.: WHAT WENT WRONG? (905M43) (Prepare for oral
discussion; written submission not required)
Teaching Objectives
1. Management of mergers and acquisitions in a turbulent environment.
2. Causes of M&A failure.
Student Assignment
1. What are the major driving forces in the telecommunications industry? How have
they affected the long distance business?
2. What was Worldcom’s corporate strategy until 1997? Did it add value?
3. Why did Worldcom’s acquisition of MCI fail to live up to expectations?
4. What were the leading causes of Worldcom’s poor performance leading to the
bankruptcy of Worldcom?
Case #2: CADBURY SCHWEPPES: CAPTURING CONFECTIONERY (Prepare for oral
discussion; written submission not required)
A Case (9-708-453), B Case (9-708-454)
Teaching Objective
1. To analyze a major acquisition in detail – covering the overall corporate strategy, the
bid process, and integration.
2. To illustrate synergy aspects of M&A.
Student Assignment
1. As a member of the Board of Cadbury Schweppes would you approve a bid of more
than $4 billion for Adams? What are the arguments for the acquisition and those
against the acquisition?
Case #3: CADBURY SCHWEPPES: CAPTURING CONFECTIONERY (Prepare for oral
discussion; written submission not required)
C Case (9-708-455)
D Case (9-708-491)
Teaching Objective
1. To study of how a large acquisition is actually integrated into another organization.
Student Assignment
1. Why was the acquisition of Adams so successful?
2. What do you learn from this case about how to effectively utilize acquisitions as part
of a successful corporate strategy?
3. Was Cadbury the best buyer of Adams?
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Case #4: HEWLETT-PACKARD-COMPAQ MERGER (9-104-048) (Prepare for oral
discussion; written submission not required)
Teaching Objectives
1. Importance of sound strategic analysis in evaluating the merits of an acquisition.
2. Role of corporate boards in mergers and acquisitions.
3. Role of third parties (consultants, investment bankers, analysts, and institutional
investors in M&A).
Student Assignment
1. What were the strategic challenges faced by HP?
2. Does HP acquiring Compaq help HP deal with its strategic problems?
3. Evaluate the performance of HP’s board of directors in the way they confronted the
strategic issues facing Hewlett-Packard and for the way it handled itself in the
merger.
4. What is your assessment of the role played by third parties – consultants, investment
bankers, analysts, and institutional investors in this deal?
Case #5: PROCTOR & GAMBLE’S ACQUISITON OF GILLETTE (KEL183) (Prepare for
oral discussion; written submission not required)
Teaching Objectives
1. Analysis of synergies and valuation techniques supporting the deal.
2. Conflicts of interest for an investment bank in an M&A transaction.
3. Pros and cons of receiving shares or cash from both the perspective of the acquirer
and target.
4. Fairness of large executive pay packages when there is a “change of control.”
5. Impact of politicians and regulators on M&A deals.
Student Assignment
1. What were the potential synergies in P&G’s acquisition of Gillette?
2. In light of Gillette’s large increase in shareholder value during James Kilt’s tenure,
was his pay package reasonable and in the best interest of shareholders?
3. Discuss the positive and negative aspects of receiving shares or cash from the
perspective of P&G and Gillette shareholders.
4. What are the possible reasons as to why P&G did not use a collar in the merger
proposal?
5. Compare the valuation analyses in Case Exhibits 6-9. Based on this analysis,
determine the bid range that you would recommend to P&G’s board of directors.
6. Discuss the conflicts of interest for an investment bank in an M&A transaction.
7. Discuss the possible impact politicians and regulators can have on an M&A deal.
8. Evaluate the role played by Warren Buffet in the merger.
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Case #6: AMERICAN CYANAMID (A) & (B) COMBINED (9-898-120) (Prepare for oral
discussion; written submission not required)
Teaching Objectives
1. To explore the factors influencing the market for corporate control and the boardroom
dynamics associated with a hostile takeover offer.
Student Assignment
1. Was AHP’s decision to bid for Cyanamid a good one for both firms’ shareholders?
What evidence would you cite to support your case?
2. What are the potential sources for value creation, if any, in an AHP/Cyanamid
merger?
3. How did Cyanamid’s management respond to the AHP offer? Whose interests were
they taking into account? Whose interests should be taken into account when
considering a takeover offer?
4. How can we explain the fact that American Cyanamid’s managers continue to express
a preference for the SmithKline Beecham asset swap even after Perella’s analysis
showed it to be a lower-valued alternative than the sale to AHP?
5. In your view, what per share value would the SmithKline asset swap have to generate
to justify rebuffing the AHP offer? As a director, would you support management at
a value of $85, which Ellberger suggests might have been sufficient to resist AHP?
6. Was MacAvoy’s assertion that he would go to the Wall Street Journal a reasonable
response to his frustration with the boardroom processes? Why or why not, and from
whose perspective? If you think it was a weak response, what would you suggest as
an alternative?
7. What role does the market for corporate control play in the governance process? Is
the market for corporate control pressuring managers at American Cyanamid to make
a decision that is in shareholders’ short-term interest, but against the long-term
interest of the company?
8. What factors have contributed to boards of directors’ inability to govern publicly
traded corporations effectively? Which, if any, of these materialize in the boardroom
conflict at Cyanamid?
9. Why has the pressure for directors to “wake up” become more intense in the 1990s
than it was in the 1980s? Do you think corporate performance and competitiveness
will improve as a result? Why or why not?
10. In a speech to MBA students at Northwestern, John Smale (former CEO of Proctor
and Gamble and director of several Fortune 500 companies, including General
Motors) stated: “Certainly the pursuit of optimum value for the shareholders is an
important obligation of the corporation, but it should not be the primary obligation.
The primary obligation of management and of a board of directors should be to the
corporation and its successful continuation. Let me repeat that for emphasis. The
primary obligation of management and of a board of directors should be the
corporation and its successful continuation.”
Do you agree or disagree? Why? How is this statement relevant to the boardroom
dynamics at Cyanamid?
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Case #7: BCE INC.: IN PLAY (909N18) – To be handed in and graded
Teaching Objectives
1. Specifically, this case provides students with an opportunity to assess comparable
trading multiples and consider why the target company may be trading at a discount
or premium to its comparable peers.
2. Apply discounted cash flow analysis and precedent transaction analysis to determine
the value of an acquisition target.
3. Gain a broader understanding of the leveraged buyout process and consider its
advantages and disadvantages.
4. Construct an internal rate of return (IRR) analysis to determine the return a private
equity investor could achieve within their respective holding period, based on the
chosen total leverage multiple and the exit multiple.
5. Analyze the value impact of synergies to a strategic buyer and consider what
maximum bid range might be appropriate, based on total synergies assumed.
6. Consider the various advantages and disadvantages of a bid from a strategic buyer
relative to a bid from a private equity investor.
7. Assess the strengths and weaknesses of the four potential bidders.
Student Assignment
1. Assess the strengths and weaknesses of the four potential bidders for BCE.
2. Determine what BCE is worth to the three private equity consortiums, based on
relative valuations, precedent transactions, and discounted cash flow analysis (DCF).
For the DCF analysis, assume the sale of non-core assets.
3. Determine the bid range that would be appropriate for Telus in light of the synergies
deemed to be achievable. What other considerations would be important with a
potential bid by Telus?
4. From a private equity consortium perspective, what is the potential internal rate of
return (IRR) on the investment, given the proposed initial investment and exit price
assumed in the case? How sensitive is the return to the amount of leverage and the
exit price?
5. From the perspective of the bidder, what challenges might arise in financing such a
large transaction? What strategic considerations would need to be taken into account,
relative to other bids? What potential opportunities might exist to exit their
investment in three to five years?
6. From the perspective of BCE, how might the Strategic Overnight Committee weigh
the prospect of an all-cash bid from a private equity bidder against a potential cashand-stock bid from Telus? What price might the committee feel was adequate, given
BCE’s historical and recent share price performance? How would the committee
ensure it was maximizing the value to BCE’s shareholders?
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