FIE443 MERGERS AND ACQUISITIONS, SPRING 2015

Course faculty
Professor Karin Thorburn, Department of Finance, C-313, karin.thorburn@nhh.no
Office hours: by appointment
Course assistant: Mariann Nyland, Department of Finance, C-312, mariann.nyland@nhh.no
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 requirements, 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.

FIE443 M&A, Spring 2015

Professor Karin Thorburn

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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 karin.thorburn@nhh.no and with a copy to mariann.nyland@nhh.no.
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.

FIE443 M&A, Spring 2015

Professor Karin Thorburn

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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

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Day

Date

Topic

Mon
Thu
Mon
Thu
Mon
Thu

19.01
22.01
26.01
29.01
02.02
05.02

Introduction to M&A
Valuing a target
Acquisition deliberations
Contingent value rights
Bidding tactics and bidder gains
Empty voting

Mon 09.02
Thu 12.02

Mon
Thu
Mon
Mon
Thu
Mon
15 Mon
16 Tue

16.02
19.02
23.02
02.03
05.03
09.03
16.03
28.04

Case
Mercury Athletics
Monmouth
General Mills - Pillsbury
Mylan Lab

Incentive effects of deal financing

Structuring the deal

AXA-MONY

Takeover negotiations
Negotiation debrief
Hostile takeovers
Leveraged buyouts
Structuring an LBO
Governance issues in M&A
Sale of XXL to EQT and subsequent IPO

AT&T / McCaw

Term project presentations

FIE443 M&A, Spring 2015

Visitor

Erik Rnnov

Roche-Genentech
Lubrano Can
Stanley, Black & Decker
Petter Brreng
Note: All day

Professor Karin Thorburn

Ivar Andreas
Lemmechen Gjul,
Erik Rnnov,
Mats Samdahl Weltz

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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.

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Professor Karin Thorburn

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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?

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Professor Karin Thorburn

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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, ronnov@mac.com
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.

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Professor Karin Thorburn

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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 standalone 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?

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Professor Karin Thorburn

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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, pb@gcorp.no
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, iag@fondsfinans.no
Erik Rnnov, Owner, Reos Holding AS, ronnov@mac.com
Mats Samdahl Weltz, Equity Analyst, Arctic Securities, mats.weltz@arcticsec.no
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.

FIE443 M&A, Spring 2015

Professor Karin Thorburn

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