INTERNATIONAL UNIVERSITY OF JAPAN The Course Syllabus for *** Special Topics in Finance: Corporate Restructuring and M&A

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Instructor: Takato Hiraki (Visiting Professor) Teaching Assistant(s): Office Hours: 12:00 Noon through 13:00 pm and by appointment on Monday Contact: hiraki@ms.kuki.tus.ac.jp Term: Winter 2011 Credit: 2 Credits Schedule: 2nd and 3rd Period on Monday Course Description and Learning Objectives:

This course is designed to provide second-year finance major MBA students already acquired general understanding of valuation techniques for corporate investments. The topics to be discussed include various transactions that restructure the firm in some particular way. Down-sizing is one example, involving asset sales. The objectives of this course are: (1) to help the students build a framework to analyze corporate restructuring/reorganizations through financial analysis; (2) to provide an overview of approaches in corporate restructuring and mergers and acquisitions aimed at solving the strategic problems of firms; and (3) to establish an economic perspective to access corporate and social consequences of alternative corporate restructuring and reorganization techniques. Student skills of valuation and its strategic use will be advanced through this carefully designed corporate restructuring course.
Career relevance This course is useful for investment banking career, especially, for a financial advisory career in global perspectives. This career involved a deal-making between asset buyer and seller on a large scale. It is also useful for a corporate financial and general management career since today M&A is one of the most important strategic alternative for corporate growth and survivorship. Course Context: The course is based directly related to basic finance and accounting courses since both deal with cash flows and risk associated with investments. So, these courses are prerequisites. The course used strategic concepts in management and microeconomics in terms of organizational architecture for value creation. The course should be positioned along with other capital markets/investment and applied corporate finance courses in the area of finance. Delivery methods: This course used interactive lecturing, case discussion, problem solving in homework, presentation and case write-ups. Assessment:

Participation to Class Discussion (30%) --- Homework is a part. One Case Write-up (Group 30%) Assigned Case Presentation (30%) Attendance (10%)
Prerequisite: See the Course Context Section above.

Required textbook(s) and other resources: No required textbook. However, the following reserve book list lists up recommended books for student preparation:

1) James K. Seward (JKS), Corporate Restructuring and Reorganization, mimeo. 2) Brealey, Myers and Allen (BMA), Principles of Corporate Finance, Ninth Edition (International Edition), 2008, MacGraw-Hill. (PART 10)
3) Westo, Mitchell and Mulherin (WMM), Takeovers, Restructuring, and Corporate Governance, Fourth Edition (International Edition), Pearson (Prentice Hall), 2004. 4) D.M. DePamphilis (D), Mergers, Acquisitions, and Other Restructuring Activities, Fifth Edition,

HBS Cases and Notes are in a packet.

Tentative outline:

Weekly Scheduled Topics

Week Week 1

Topics Brief Introduction and Overview a) Overview of Corporate Restructuring b) Overview of Valuation Techniques Required Reading: D: Part I. 1. (3-46) WMM: PART IV, 288-328 & Chapter 16 (406-445) and JKS for Restructuring Overview WMM: PART III, 232-256 and Appendices A & B in Chapter 16, and D: Chapter 7 for Valuation Overview

Week 2 (partly we use our time to complete the leftover in the week 1) Equity Carve-out Transactions: Required Reading: WMM: PART IV, p. 288-328 and JKSs related parts D: Chapter 15 (Equity Carrve-Outs) J.W. Allen, Capital Markets and Corporate Structure: The Equity Carve-outs of Thermo Electron, Journal of Financial Economics (1998). Optional Readings: Case: Eskimo Pie Case Study Questions: Please assume that the target D/V for Eskimo Pie is set at zero. 1. Lets try to derive the standalone value of Eskimo Pie Corporation by using the DCF method. a) Cash flow projection of Eskimo Pie

For 1991 - 1993thereafter, the company enters the steady state with a constant growth rate.) b) Using the data of the comparable firms of Eskimo Pie, lets compute its asset beta for D/V= 0 and RV = RE = WACC. (Assume the expected market risk premium is 7.5% per year and the risk free rate is 7.42%.) c) Optional -- Giving different values to the growth rate of net cash flow and the discount rate, perform the sensitivity analysis. Please identify the range of the growth rates and discount rates which jointly yield a higher value than the one offered by Nestle. 2. Next, what is the standalone value of Eskimo Pie Corporation when the multiple-based approach is used? Which multiple(s) are likely for the best value? See Ex. 8 more carefully and choose two multiples. 3. Why did Nestle offer to buy Eskimo Pie? Is the value of Eskimo Pie for Nestle higher than the standalone value? 4. As an advisor for Reynolds, which strategy would you recommend between the sale to Nestle and the alternatively proposed IPO?

Week 3

Spin-off Transactions: Case: Humana Inc. (HBS Case) Case Study Questions: 1. 2. Do you think Humanas problems were serious enough to warrant some form of restructuring? How much extra value would be created by separating the hospital and health plan segments through a spin-off? What are the sources of this additional value, and how should the spin-off be structured for Humana to realize maximum benefits from the spin-off? Kaiser Permanente has employed an integrated strategy of owning both hospitals and health plans for many years, and some would argue with great success. This suggests that Humanas problems are not the fault of its integrated strategy per se, and that breaking apart the hospital and health plan segments may not enhance shareholder value in the long run. Do you agree or disagree? Do any of the other options considered by management represent a more sensible solution to Humanas problems than the spin-off?

3.

4.

Required Readings: WMM: PART IV, p. 288-328 (especially, p. AT&T case in Table 11.3 on p. 291) and JSKs related parts D: Chapter 15 (Spin-offs and Split-Ups) K. Schipper and A. Smith, The Corporate Spin-off Phenomenon, The Revolution in Corporate Finance, (Stern & Chew, eds.), Basil Blackwell Ltd., pp. 437-43.

P. Cusatis, J.A. Miles and J.R. Woolridge, Some New Evidence That Spinoffs Create Value, Journal of Applied Corporate Finance (April 1994).

Week 4 Tracking Stocks: (Targeting Stocks) Case: USX Corporation (HBS Case) Case Study Questions: 1. In 1986, then-chairman and CEO David Roderick described USX as possibly one of the most restructured corporations in America. Even so, Carl Icahn believed that further restructuring of the company was still necessary. In late 1990, what operating and/or strategic problems, if any, do USXs two main businesses still face that would warrant some form of additional restructuring? Do you think there is any merit in Carl Icahns claim that problems in USXs steel business are depressing the value of its energy business? As a USX stockholder, how credible a spokesperson do you consider Icahn to be on this issue? Which restructuring option Icahns spinoff proposal or the companys targeted stock proposal will create the most value for shareholders? For creditors? For the firms other stakeholders? For what kinds of companies is targeted stock most appropriate? Least appropriate? Should the company seriously consider any other options besides doing a spinoff or issuing targeted stock? If the company decides to go ahead with the targeted stock issue, what specific provisions or features should the stock include to ensure maximum value creation? How closely would you model USXs targeted stock on GMs alphabet stock?

2.

3.

4. 5. 6.

Required Reading: D: Chapter 15 (Tracking, Targeted, and Letter Stocks) WMM: PART IV, p. 288-328 (especially, p. AT&T case in Table 11.3 on p. 291) JSKs related parts. D. Logue, J. Seward and J.P Walsh, Rearranging Residual Claims: A Case for Targeted Stock, (Financial Management, Spring 1996).

Week 5

Leverage and Management Buy-Outs Classical Case of LBO/MBO Classical MBO Case: RJR Nabisco 1. What was the value of RJR Nabisco under: a) the pre-bid operating strategy? b) the Management Groups operating strategy? c) KKRs operating strategy?

What accounts for any difference in the value of the three operating plans? 3. Evaluate the Special Committees use of an auction of RJR Nabisco? 4. Which bid should the Special Committee select, if any? What other actions should the Special Committee take? Required Reading: WMM: Chapter 16 (especially Valuation of LBO, p. 431-433 ) JSKs related parts D: Chapter 13

2.

Week 6

Leverage Recapitalization Case: Colt Industries (HBS Case) Case Questions: 1. Why should Margolis consider a recapitalization at this particular point in time? 2. Explain how the leveraged recap transaction works, and what constraint a successful plan must meet. 3. How is value created and/or reallocated in a leverage-increasing transaction? Who benefits in the case of the Cold recap? 4. In general, why might a recap be used instead of a leverage buyout? Required Reading: M. Jensen, Agency Cost of Free Cash Flow, Corporate Finance and Takeovers, (American Economic Review 76, 323-329, 1986) WMM: Chapter 13 and JSKs related parts I. Isik Inselbag and H. Kaufold, How to Value Recapitalizations and Leveraged Buyout (Journal of Financial Economics 27, 215-245,

1990)
Steven Kaplan and J. Stein, How Risky Is the Debt in Highly Leveraged Transactions, (Journal of Financial Economics 27, 215-245, 1990)

Week 7

M&A Activities in Japan M&A Environment in Japan Special Topic on the First (Hostile) TOB Made by Industrial Firm Case: Oji Paper Manufacturing vs. Hokuetsu Paper Mill Required Reading: WMM: Chapter 1 (especially p. 10-11); Chapter 6 Questions: 1. How do you evaluate the business (value creation) and tender offer strategy provide by the Oji management? 2. How do you evaluate the explanation made the Hokuetsu management to decline the merger proposal of Oji?

3.

How do you evaluate the overall result from an economic perspective and other viewpoints? (*A short-essay report is due for those platform students on exchange.)

Week 8

Corporate Restructuring in Japan Case 1: Holding Company System in Japan: NTT Group Case 2: Group Reformation in Japan: Panasonic (IUJ-IMC Student Projects)

Week 9

Real Options in Assets Traded Case: MW Petroleum (A) Case Questions: 1. What is the rationale of the deal? Why should we perform valuations? 2. What are the methods you will use to perform valuation and what are their values? 3. What are the options, and what are the values of the Strike, Underlying etc.? 4. How does Real Option Analysis differ from DCF or APV analysis? 5. How would you estimate the volatility parameter?

Required Reading: HBS Notes: Real Options When Multiple Sources of Uncertainty Exist WMM: Chapters 9 (especially, p. 238-243) and 22 (especially, p. 646-648) D: Chapter 8 (p. 299-311) Week 10 Hostile Takeovers in the Global Telecommunication Industry Case: Vodafone AirTouchs Bid for Mannesmann Case Questions: 1. What was the strategic and economic rationale for Mannesmanns acquisition of Orange? Did Mannesmann overpay for Orange? 2. Vodafone AirTpuch prposed that each Mannesmann share would receive 53.7 Vodafone AirTouch shares, so that in aggregate Mannesman shareholders would own 47.2% of the equity of the new combined firm. a) Describe the stock swap. As of December 17, what was the market value of Mannesmanns contribution to the combined firm? Assa Manessmann shareholder, would you accept the current offer? As a Vodafone shareholder, would you support the proposed transaction? b) On December 17, 1999, based on real stock prices of the two firms, it seemed that the market estimated the probability of Vodafone AirTouch successfully acquiring Mannesmann at around 0.6. (We will obtain this figure in our discussion alter.) Under the assumption that if the bid fails both firms would trade at prices prevailing on Oct. 21, 1999, what is the markets estimate of implied synergies from the deal? c) What is the present value of the expected synergies as shown in Exhibit 10 as of March 2000? (You may want to assume that the synergies

related to revenues and costs extend beyond 2006, and that the merger will not affect the firms level of working capital.) Use the average exchange rate of 1=1.5789to covert pound synergies into Euros. d) UK equities returned 7.7% (on pounds) over the UK risk-free rat for the period 1919-1993 and 6.8% over the UK risk-free rate for the period 1970-1996. How might this observation affect your decision? Required Reading: WMM: PART V (especially, Chapter 17) & See: Case 17.3 on p. 480-4829 D: Chapter 17 (Cross-Border M&A) Case Presentation: Weekly cases, Humana, USX, RJR Nabisco, Colt Industries, MW Petroleum and Vodafone, are assigned to each of the student groups for presentation. The student presentation is based on case questions before formal class discussion of the case assigned. It is typically given 30 to 40 minutes. It should not include the case background since we assume everybody is ready for the case discussion finishing very through case reading. Each team should consist of 2 to 4 students. If required, some students may present twice or two cases rather than one or one time. The student presentation schedule in the class MGMT folder should be completed in two weeks before the Humana case start in week 3 by the course committee formed when we meet in week 1.