FIE443-2015-

FIE443 M&A, Spring 2015 Professor Karin Thorburn 1 (8)

FIE443 MERGERS AND ACQUISITIONS, SPRING 2015 Course faculty Professor Karin Thorburn, Department of Finance, C-313, [email protected] Office hours: by appointment Course assistant: Mariann Nyland, Department of Finance, C-312, [email protected] Learning objectives This is a course on corporate mergers and acquisitions (M&A). The objective is to give students skills that are necessary to structure a deal or form an opinion about a proposed transaction. The course is relevant for students seeking a career in investment banking, consulting, private equity, or the corporate sector.

Upon completion of the course, students shall:

Have obtained a deep understanding of central issues in M&A

Be able to build a simple spread-sheet model to value a target

Have a basic understanding of the implications of different payment method choices

Understand the incentive effects of various deal structures

Be able to identify, structure and pitch an M&A transaction to a potential acquirer Topics The course covers a broad range of M&A related topics, such as value creation in mergers, choice of payment method, valuation of contingent payments, deal protection devices, incentive effects of deal financing, merger arbitrage, bidding strategies, leveraged buyouts, hostile takeovers, and defensive tactics. It also covers key elements of the legal and regulatory framework for takeovers, such as filing re-quirements, fiduciary duties of the target board of directors, and antitrust regulation. Course materials The required textbook is Mergers, acquisitions, and corporate restructurings, Patrick A. Gaughan, 5th ed., John Wiley & Sons, 2011 (below Gaughan).

In addition, the course package contains a number of cases and readings. Additional (voluntary) readings A good review of corporate valuation techniques is found in Valuation: measuring and managing the value of companies by Tim Koller, Mark Goedhart and David Wessels, 5th ed., John Wiley & Sons, 2010.

The legal side of takeovers is covered in great detail in Takeovers: A strategic guide to mergers and acquisitions by M.M. Brown, R.C. Ferrara, P.S. Bird, G.W. Kubek and W.D. Regner, 3rd ed., Aspen Publishers, 2011.

For entertainment, you can also read Bruce Wassersteins Big deal: 2000 and beyond, Warner Books, 2000, and Robert F. Bruners Deals from hell: M&A lessons that rise above the ashes, John Wiley & Sons, 2005.


Teaching philosophy This is a case based course, supported by lectures and visitors. While the readings are extensive, the emphasis of the course is on the analysis of the assigned cases. This is where you should focus your effort.

Students have a responsibility to be well prepared and actively participate in the classroom discussion. You should be ready to discuss your analysis of the assigned case and to show your calculations. I encourage voluntary participation but may call on any student to discuss the assignment. While you are encouraged to work in groups when preparing for class, all class participation is individual effort.

You may not use notes or other material from any previous offering of this or a similar course, or discuss the material with students who have already taken the course. This restriction extends to case-related information obtained from other sources. Requirements for course approval The total grade has two parts: class participation and a term paper. There is no final exam.

Class participation Class participation is individual effort and makes up 40 percent of the course grade. I grade class participation after each session on a scale from 0-3. The overall class participation grade is the sum of the individual participation scores over the whole term.

Students should attend every class. Absence affects the participation grade negatively (I assign a participation score of -3 for a missed class) and students may fail the course for this reason.

My ability to identify each individual student is critical for the quality of the class participation grade. For this purpose, each student will get a name card that should be brought to every class. In addition, you should upload a photo on Its Learning in the first week of class.

Term project (due 28.04) The remaining 60 percent of the grade is based on a term paper, written in groups of four students. The term paper should structure and analyze a potential or recent takeover transaction. You should pick a bidder and a target, justifying why this target is an attractive acquisition for the bidder. The paper should analyze a range of different aspects of the transaction, including the strategic and economic benefits, bid range, type of consideration, bidding strategy, legal and tax aspects, anticipated management reaction, and potential competition. The standards that the analysis is held to are higher for an existing transaction than a proposed transaction. The paper should be written in English.

Students will present their term papers on Tuesday April 28. The presentation should take the form of a pitch, convincing the target or the bidder of the benefits of the transaction. The presentations will be scheduled throughout the whole day (from 8 to 17), and students are expected to attend and actively participate in the discussion of all other presentations. There will be several industry professionals attending and commenting on the term paper presentations.

A final draft of the term paper is due on the same day. It should be emailed, together with the presentation, to [email protected] and with a copy to [email protected].

Case write-up (due 26.01) To participate in the class, students are required to hand-in a short (3-4 pages) write-up of Monmouth, due at the beginning of class on 26.01. Failure to do so is equivalent to failing the class. The write-up should address the assigned case questions and be written in English. This is an individual assignment, graded with pass or fail.


Laptop policy I do not allow the use of laptops or reading pads in class. If I see an open laptop, I assign a class participation score of -3 for that day. Bring printouts of your calculations to class. Other To provide ample opportunity to contribute to the classroom discussion, the class is limited to 60 participants. In case of excess demand, students majoring in finance and students with a strong background in corporate finance will get priority. Note, however, that all students are welcome to attend the first week of class. It is common practice among NHH students to overenroll, and students on the waiting list are likely to make it into class. Pre-requisite coursework Students are required to have taken a master-level course in corporate finance, such as FIE402 or equivalent. Computer skills Students should be familiar with Excel and Word. Language: English

Credits: 7.5 points

Class time: 12-14 Course overview

Day Date Topic Case Visitor

1 Mon 19.01 Introduction to M&A

2 Thu 22.01 Valuing a target Mercury Athletics

3 Mon 26.01 Acquisition deliberations Monmouth

4 Thu 29.01 Contingent value rights General Mills - Pillsbury

5 Mon 02.02 Bidding tactics and bidder gains

6 Thu 05.02 Empty voting Mylan Lab

7 Mon 09.02 Incentive effects of deal financing AXA-MONY

8 Thu 12.02 Structuring the deal Erik Rnnov

9 Mon 16.02 Takeover negotiations AT&T / McCaw

10 Thu 19.02 Negotiation debrief

11 Mon 23.02 Hostile takeovers Roche-Genentech

12 Mon 02.03 Leveraged buyouts

13 Thu 05.03 Structuring an LBO Lubrano Can

14 Mon 09.03 Governance issues in M&A Stanley, Black & Decker

15 Mon 16.03 Sale of XXL to EQT and subsequent IPO Petter Brreng

16 Tue 28.04 Term project presentations Note: All day

Ivar Andreas Lemmechen Gjul, Erik Rnnov, Mats Samdahl Weltz


DETAILED SCHEDULE FOR FIE443 MERGERS AND ACQUISITIONS:

1. Introduction to mergers and acquisitions (Mon 19.01, 12-14)

Course introduction, merger waves, case-based learning

Readings: Gaughan, Chapters 1 and 2

2. Valuing a target (Thu 22.01, 12-14)

DCF, WACC valuation, free cash flow projections, cost of capital, terminal value, multiples

Case: Mercury Athletic Footwear: Valuing the opportunity (HBS 4050)

Case questions 1. Is Mercury an appropriate target for AGI? Why or why not? 2. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend

modifying them? 3. Estimate the value of Mercury using a discounted cash flow approach and Liedtkes base case

projections. Be prepared to defend additional assumptions you make. 4. Do you regard the value you obtained as conservative or aggressive? Why? 5. How would you analyze possible synergies or other sources of value not reflected in Liedtkes base

case assumptions?

Readings: Gaughan, Chapter 14

3. Acquisition deliberations (Mon 26.01, 12-14)

Strategic fit, valuation of the target, cash vs. stock consideration, exchange ratios and acquisition premiums, accretion and dilution, debt vs. equity

Case: Monmouth, Inc. (HBS 4226)

Case questions 1. If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control

of Robertson Tool in May 2003? What makes the target an attractive candidate for Monmouth? Is it a good strategic fit?

2. What is the maximum price that Monmouth can afford to pay based on a discounted cash flow valuation? Based on market multiples of EBIAT? How should one account for the synergies?

3. What exchange ratio can Monmouth offer before the acquisition has a dilutive effect on Monmouths earnings per share (EPS)? Is it important to consider the impact of an acquisition on EPS? How can decisions based on EPS go wrong?

4. Based on Monmouths balance sheet and income statement (see separate sheet), is it feasible for Monmouth to pay with cash or debt finance a cash bid? How would an all-cash bid impact EPS?

5. Why is Simmons eager to sell its position to Monmouth for $50 per share? What are the concerns of and alternatives for each of the other groups of Robertson shareholders?

Note: A brief case write-up is due at the beginning of class

Readings: Gaughan Ch. 4 Rappaport, Alfred, and Mark L. Sirower, 1999, Stock or cash? The Trade-Offs for Buyers and Sellers in

Mergers and Acquisitions, Harvard Business Review (Nov-Dec), reprint 99611.


4. Contingent value rights (Thu 29.01, 12-14)

Valuation of contingent value rights, price protection, floors, caps, and collars, earnouts

Case: General Mills acquisition of Pillsbury from Diageo Plc. (UV0089)

Case questions 1. What are General Mills motives for this deal? Estimate the present value of the expected cost

savings. 2. Why was the contingent value right (CVR) included in this transaction? How does it affect the

attractiveness of the deal from the standpoints of General Mills and Diageo? How is an earnout different from a CVR, and in what situation should one or the other be used?

3. How does the contingent payment work? Draw a payoff diagram (a hockey stick diagram) of the claw-back feature. What option positions should you take to create the same payoff?

4. What is the contingent payment worth when the deal is negotiated in July 2000? What is it worth when shareholders vote on the deal in early December 2000? Use a Black-Scholes calculator (you can always download one from the internet).

5. Is this deal economically attractive to General Mills shareholders? Would you recommend that shareholders approve or reject the deal?

6. What can the bidder do to protect its shareholders from stock price fluctuations before the deal is closed? How can the target protect its shareholders?

Readings: Gaughan Ch. 3 Caselli, Stefano, Stefano Gatti, and Marco Visconti, 2006, Managing M&A risk with collars, earn-outs

and CVRs, Journal of Applied Corporate Finance 18 (4), 91-104. Amobi, Tuna N., 1997, Price protection in stock-swap transactions, Merger & Acquisitions 32, 22-28.

5. Bidding tactics and bidder gains (Mon 2.02, 12-14)

Who buys who, toeholds, control premiums, bidder gains, tender offers

Readings: Gaughan Ch. 6 Eckbo, B. Espen, 2014, Corporate takeovers and economic efficiency, Annual Review of Financial

Economics, in print.

6. Empty voting (Thu 5.02, 12-14)

Evaluation of the control premium, expected deal probability, merger arbitrage, empty voting

Case: Mylan Laboratories Proposed merger with King Pharmaceutical (HBS 9-214-078)

Case questions 1. Does this deal create value? Is it a good deal for Mylan? For King? 2. Shareholders in both Mylan and King must vote in favor of the merger for it to go ahead. What does

the reaction of the firms stock prices to the announcement of the merger suggest about how each group should vote?

3. Use the information contained in the market prices to form an assessment of the likelihood of the merger being consummated.

4. What is Perry Capital trying to achieve, and why? Consider the various ways in which they could structure their trade in order to achieve this end. Should the SEC aim to prevent future similar trades, and if so, how?


Readings: Wyser-Pratte Guy P., Merger Arbitrage, Merger & Acquisition Handbook, 2nd ed. by Rock-Rock-Sikora,

1987.

7. Incentive effects of deal financing (Mon 9.02, 12-14)

Change of control payments, convertible bonds as deal financing, voting and trading incentives

Case: AXA MONY (HBS 9-208-062)

Case questions 1. Why is AXA bidding for MONY? Does the deal make sense for AXA; for MONY shareholders; for

management? As a MONY shareholder, what are your concerns about the deal? 2. How did AXA finance the takeover bid? Explain the structure that AXA used. Why did AXA use this

structure? What effects, if any, do you think this method of financing has on the likelihood of the deal succeeding?

3. How would you price the ORAN at issue? Is it fairly priced? What does the price of the ORAN on February 9, 2004, imply for the probability of the deal succeeding? What is the fair price of MONY stock?

4. Suppose that you hold a position in the ORAN on February 9. Would you want to buy or sell MONY stock (a) at the fair price calculated in question 3 above or (b) at the market price of $31.55? How do you explain the price of MONY stock on February 9?

5. Suppose that you manage a $2bn hedge fund with a significant stake in MONY and that on February 10 you receive a phone call asking to buy your stock at above the market price if you sign over the voting rights with the shares. What considerations would enter into your decision about whether to sell you MONY stock at $31.55 on February 9?

8. Structuring the deal (Thu 12.02, 12-14)

Visitor: Erik Rnnov, Owner, Reos Holding AS, [email protected]

Readings: The company sale process (HBS 9-206-108)

9. Takeover negotiations (Mon 16.02, 12-14)

Negotiating a transaction, opening and walk away bid

Case: American Telephone & Telegraph (AT&T): The AT&T/McCaw merger negotiation, UVA-F-1142, or McCaw Cellular Communications: The AT&T/McCaw merger negotiation, UVA-F-1143.

10. Negotiation debrief (Thu 19.02, 12-14)

Biases affecting negotiations, effective negotiation tactics, how to come prepared

Readings: Aiello, Robert J., and Michael D. Watkins, 2000, The Fine Art of Friendly Acquisition, Harvard Business Review (Nov-Dec), reprint R00602. Giving Great advice: An Interview with Bruce Wasserstein, 2008, Harvard Business Review (jan), reprint R0801G.


11. Hostile takeovers (Mon 23.02, 12-14)

Takeover defenses, defensive strategies, termination fees, poison pills

Case: Roches acquisition of Genentech (HBS 9-210-040)

Case questions 1. Why is Roche seeking to acquire the 44% of Genentech it does not own? From Roches point of

view, what are the advantages of owning 100% of Genentech? What are the risks? 2. As a majority shareholder of Genentech, what responsibilities does Roche have to the minority

shareholders? 3. As of June 2008, what is the value of the synergies Roche anticipates from a merger with

Genentech? Assess the value of synergies per share of Genentech. 4. Based on DCF valuation techniques, what range of values is reasonable for Genentech as a stand-

alone company in June 2008? What does the analysis of comparable companies indicate about Genentechs value established in the DCF?

5. How has the financial crises affected Genentechs value? What changes in valuation assumptions occurred between June 2008 and January 2009?

6. How did Genentechs board and management respond to Roches offer of $89 per share? 7. What should Franz Hummer do? Specifically, should he launch a tender offer for Genentechs

shares? What are the risks of this move? What price should he offer? Should he be prepared to go higher? How much new financing will Roche need to complete the tender offer?

Note: Use a 9% WACC and assume that Roche has 1,052 million shares outstanding and $7 billion in cash by the end of June 2008.

Readings: Gaughan Ch. 5

12. Leveraged buyouts (Mon 2.03, 12-14)

Target characteristics, the capital structure, returns to investors, value creation in LBOs,

Readings: Gaughan Ch. 7, 8

13. Structuring an LBO (Thu 5.03, 12-14)

Arranging a capital structure for a leveraged buyout target, managerial incentives, exit

Case: Lubrano Can

Prepare a presentation of the investment case and the proposed capital structure, including a discussion about managerial incentives and exit strategy.

14. Governance issues in M&A (Mon 9.03, 14-16)

Corporate governance issues in merger transactions, the board of directors, golden parachutes

Case: Stanley, Black & Decker, Inc. (HBS 9-211-067)

Case questions 1. What is the incremental value to shareholders of the cost savings (synergies) projected in this

merger? How will the value of the synergies be shared in the proposed transaction? 2. After failing to complete a merger following the three prior attempts noted in the case, why

should the proposed transaction be successful this time?


3. How much of the incremental value created in this transaction will go to the CEOs of the two firms involved? Hint: executive stock options awarded with a strike price at the money are typically worth one-third of the current stock price.

4. How do you think the leadership team at Black & Decker (other than the CEO) will view this transaction? How about the governor of Maryland (Black & Deckers headquarters state)?

5. What issues of corporate governance and social policy are raised by the Stanley Black & Decker merger?

6. If you were a shareholder of Stanley, would you vote in favor of this transaction? Would you vote in favor of the compensation arrangements? Would you vote to re-elect the directors at the next annual meeting?

Readings: Gaughan Ch. 12 Standards related to the sale or purchase of a company (HBS 9-904-004)

15. The sale of XXL to EQT and subsequent IPO (Mon 16.03, 12-14)

From startup to IPO: negotiations with a strategic buyer, sale to EQT, dual-track exit process and IPO

Visitor: Petter Brreng, Partner, Guardian Corporate, [email protected]

16. Term paper presentations (Tue 28.04)

Student presentations of term papers, pitch of a proposed takeover transaction

Visitors: Ivar Andreas Lemmechen Gjul, Head of Equity Research, Fondsfinans, [email protected] Erik Rnnov, Owner, Reos Holding AS, [email protected] Mats Samdahl Weltz, Equity Analyst, Arctic Securities, [email protected]

Note: the presentations are scheduled from 8 am to 5 pm. Students should attend all presentations and actively participate in the discussion of the various deal pitches.

Documents

FIE443-2015-