University of Calgary

Haskayne School of Business

MERGERS & ACQUISITIONS: FNCE 595.14 L01
DETAILED COURSE OUTLINE
WINTER 2003

Instructor: Dr. Thomas Cottrell

Office: SH 146
Telephone: 220-4477
E-Mail: cottrell@ucalgary.ca
Webpage: http://www.ucalgary.ca/~cottrell/teaching.html
Office Hours: Tuesdays 3:30 - 4:30pm or by appointment.
Class Times: Tuesday/Thursday 2:00-3:15pm

Course Description:
This is a fourth year elective course for Finance majors. The course objective is to provide
students with an increased understanding of takeover activity and corporate governance. The
course begins with a review of valuation techniques for privately-held and publicly-traded firms.
This is important material for the course project. We then discuss the economic theory of
acquisitions as value creating events. Practical issues around takeover strategies, and takeover
defence strategies will then be reviewed and illustrated through the use of case analyses. The
course will also review how corporate restructuring can also be used to increase the value of the
firm to shareholders. We conclude with corporate governance issues and discuss methods of
ensuring congruence of management and shareholder goals.

Course Materials:
Required
Text: Takeovers, Restructuring, and Corporate Governance(3rd Ed), Weston, Chung, and
Johnson, Prentice Hall. This can be purchased in the UofC Bookstore
Case Packet: Cases are available from the MacHall copy centre.

Recommended:
Other: Mergers, acquisitions and corporate restructurings (2nd Ed), Gaughan, Wiley, 1999

There is also a readings packet available in the MRC

Grading Schedule:
Participation 10%
Project 30%
Mid-term Examination 30%
Final Examination 30%

Participation (10%):
Includes attentiveness, listening, attitude and participation in class discussions.

Project (20%):
Groups will select a recent takeover transaction, with approval from the professor on a first-come
first-reserved basis. A project proposal briefly describing the selected takeover and the reason
for selection is due February 27th & final project is due April 18th. The project write-up will
describe: the industry setting, the rationale for the takeover, the acquisition strategy used by the
acquirer, any defence tactics adopted by the target, valuation of the bidder and the target, and the
economic implications (event study) of the takeover.

Examinations:
There will be 2 closed book examinations, including a registrar scheduled final.

Grading Schedule:

95 A+
90 A
85 A-
80 B+
75 B
70 B-
65 C+
60 C
50 C-
45 D
40 F

Fnce 595.14 L01 Winter 2003 2

 Detailed Course Outline

Finance 595.14: Winter 2003

Tentative Schedule

Date Topic/Learning Objectives Reading Case

Jan- 14 Introduction & Overview Chapter 1, 7
Jan- 16 Valuation I: Ratios Chapter 9, 9a- c
Jan- 21 Valuation II: Cash Flows Chapter 10
Jan- 23 Handout 1
Jan- 28 Valuation III: Debt & APV Chapter 4, 13
Jan- 30 Wascana/CanOxy
Feb- 04 Valuation IV: Options
Feb- 06 MW Petroleum(A)
Feb- 11 Option Valuation - Monte Carlo Simulation MW Petroleum(cont' d)
Feb- 13 Market Reaction Chapter 6b
Feb- 18 Reading Week
Feb- 20 Reading Week
Feb- 25 Merger Process Chapter 2,5 Book Case 5.2
Feb- 27 Restructuring Chapter 11- 13,16 Project Proposal
Mar- 04 Restructuring Chapter 6, 7 RJRN abisco
Mar- 06 Targets
Mar- 11 Targets Chapter 10
Mar- 13 Targets
Mar- 18 Midterm (30%)
Mar- 20 Defense Chapter 18, 19 Philip Morris & Kraft
Mar- 25 Defense
Mar- 27 Evaluating Effectiveness Chapter 8 Conrail (A)
Apr- 01 Conrail (B)
Apr- 03 Structuring the Deal/A cctg Chapter 3 (skim) Handout 2
Apr- 08 Corporate G overnance Chapter 20 American Cyanamid
Apr- 10 Spin- offs Cytec
Apr- 15 Board Dynamics
Apr- 17 Wrap- up
Apr- 18 Project Due
_________ Registrar Scheduled Final

Fnce 595.14 L01 Winter 2003 3

 Case preparation questions

Case Preparation Questions

Wascana/CanOxy What are the key factors for success in the oil & gas industry?
How critical is risk management in this industry? How well has Wascana managed its
risks?
How much is Wascana worth?
As Roger Thomas, would you recommend making a bid? Why or why not? What form
should this offer take: cash, shares or some combination? How would you finance the
deal? Are there any implications of NOT making a bid?
NOTE - Here are some assumptions for valuation -
1) January '97 undeveloped land estimated at $200m
2) January '97 estimated "reserve life" is around 7 years, and assume that production will
fully deplete reserves. You'll have to make some guesses and assumptions. It may help
to estimate natural gas in barrels of oil equivalence. You will also want to account for
proven and probable reserves. With revenue and oil projections for '97 & '98, you can
make estimates of anticipated production in those years, and then make "reasonable"
production assumptions for the remaining 5 years.
MWPetroleum(A) 1. Evaluate Amoco's and Apache's corporate objectives and strategies. Is it reasonable to
expect that the MW properties are more valuable to Apache than to Amoco? What
sources of value most plausibly account for the difference between buyer and seller?
2. Structure and execute a discounted cash flow valuation of all the MW reserves using
APV. How much are the reserves worth? Is your estimate more likely to be biased high
or low? What are the sources of bias?
3. How would you structure an analysis of MW as a portfolio of assets-in-place and
options? Specifically, which parts of the business should be regarded as assets-in-place
and which as options? What kinds of options are present? Should this approach yield a
higher or lower value than the all-APV approach you employed above?
4. Execute the analysis you structured in question 3, beginning with the assets-in-place.
How risky are the assets that underlie the options; i.e., how would you estimate sigma
for each? How much is the whole portfolio worth?
5. Assuming a sale goes through, how does Apache exercise each of the various options?
When should it do so?
RJRNabisco 1. What was the value of RJR Nabisco under
a) The pre-bid operating strategy?
b) The Management Group's operating strategy?
c) KKR's operating strategy?
2. What accounts for any difference in the value of the three operating plans?
3. Evaluate the Special Committee's 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?
Philip Morris & How did the stock market assess Philip Morris' $90/share bid for Kraft?
Kraft Can PM finance the Kraft acquisition?
What is the value to shareholders of the restructuring proposed by Kraft?
As Mr. Hamish Maxwell, chairman & CEO of PM, what should you do next? As Mr. John
Richman, chairman & CEO of Kraft, what should you do next?

Fnce 595.14 L01 Winter 2003 4

 Conrail(A) 1. Why does CSX want to buy Conrail? How much should CSX be willing to pay for it?
2. Analyze the structure of CSX's offer for Conrail.
a) Why did CSX make a two-tiered offer? What effect does this structure
have on the transaction?
b) What are the economic rationales for and the takeover implications of
the various provisions in the merger agreement (i.e. no-talk clause,
lock-up options, break-up fee, and poison pill shareholder rights plan)?
3. As a Conrail shareholder, would you tender your shares to CSX at $92.50 in the first-
stage offer?
American 1. Was AHP's decision to bid for Cyanamid a good one for both firms' shareholders? What
Cyanamid evidence would you cite to support your case?
2. 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?
3. 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?
4. What role does the market for corporate control play in the governance process? What
factors have contributed to boards of directors' inability to govern publicly traded
corporations effectively? How have these changed in the past 2 decades? Which, if any,
of these materialize in the boardroom conflict at Cyanamid?
Cytec Why did American Cyanamid spin-off Cytec?
Analyse the spin-off agreement from both sides of the transaction and evaluate the
implications.
What organizational changes were made in relationship to this spin-off, and why?
What role does corporate culture play in this spin-off, how does it play that role, and what
are the implications for the 'rules of the game.'
What do analysts think of this spin-off? How should stock multiples be affected by this
deal
What do you predict for Cytec 2 years down the road?

Fnce 595.14 L01 Winter 2003 5