Mergers, Acquisitions & Analytics

M ASTER I N B USINESS A DMINISTRATION

C O U R S E S Y L L A B U S

M ERGERS , A CQUISITIONS AND A NALYTICS

Course Code: MAA

Faculty: Prof. Errol B. Perez
Class: MBA 2007
Sessions: Second Trimester: 10 sessions

Course Objective

The objective of the course is to sharpen the analytical skills of MBA Finance
students.

Course Description

MAA is an advanced course with the MBA Finance electives set. There is an
assumption that the student has done well in first year finance and has considerable
familiarity with valuation methods. As such there will be a substantial amount of time
spent in advanced topics such as exchange ratios, buyout options, total risk versus
variable risk considerations, pat options of target shareholders, and the like.
Optionalities and option valuation methods will be value-added to the standard DFC
metrics. The course is therefore quantitative but not necessarily mathematical.

Learning Methodology and Approaches Used

Seminar-type class sessions, using cases, lectures, group presentations

Evaluation and Feedback System

Class participation 50 %
Group Presentation 50 %
Total 100 %

Textbook: Applied Mergers and Acquisitions Analysts (On reserve)

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Learning Groups are composed of ≤ 3 persons each.

Course Outline

Session # Topics / Cases / Readings

1 Case: Anheuser-Busch and Campbell Taggart

In 1984, the SEC accused Paul Thayer and eight others of insider trading. Some of
Thayer's inside information came from his position on the board of Anheuser-Busch,
where he had learn about Busch's 1982 merger with Campbell Taggart before the merger
was publicly announced. The case deals with Busch's reaction after learning about the
SEC suit. In considering possible actions by Busch, students may explore the workings of
capital markets and attempt to estimate the amount of financial damage done to Busch by
the insider trading. Other issues involved ethics, the allocation of management resources
on costly legal battles, and the differing objectives of board members and managers.

SUBJECT: Finance; Beverages; Capital Markets; Ethics; Legal Aspects; Tender Offers

COPY YR.: 1991

SETTING: Missouri, Texas
LENGTH: 13

Read: Note on Insider Trading and Liability

Provides a general description and overview of U.S. law on insider trading, including the
basic theories of liability, the responsibilities of securities firm managers to prevent and
detect insider trading, and the potential penalities for insider trading. May be used with
Mebel, Doran & Co.

SUBJECTS: Assets, Ethics, Financial instruments, General management, Legal aspects

of business, Liability, Securities.

2 Case: Walt Disney Productions, June 1984

The case is set in the midst of the attempted takeover of Walt Disney Productions by the
raider Saul Steinberg in June 1984. Disney's chief executive officer ponders whether to
fight the takeover or pay "Greenmail." One significant influence on the decision is the
"true" value of the firm. The case offers, either directly or through analysis of it, several
estimate of value. The valuation question invites a review of Disney's past performance
and current competitive position. Other significant influences on the decision are the
ethics and economics of paying greenmail. The rich range of issues raised in the case
(Strategy, valuation, performance measurement, and ethics) help make it an effective first
case, review case, or final exam in a corporate finance course.

SUBJECTS: Finance; Corporate Finance; Valuation; Mergers

SETTING: U.S.

Read: Technical Note on Equity-linked Consideration, Part 2: Announcement

Effects

The announcement of merger or acquisition conveys new information to the capital

markets. Shareholders and portfolio managers assess the news and trade on the basis of
their new appraisals of value. Thus, from the actual Pstks of the two companies one can
infer from those values what investors "think" of the transaction. The change in Pstk from
the last closing price prior to the announcement to the closing price one day later is called
the (one-day) announcement effect. This series describes the basic mechanics of equity-
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linked consideration. Part 2 describes the mechanisms that underlie announcement

effects for both the target and acquiring companies in all-stock transactions.

TEACHING PURPOSE: To describe the mechanics that underlie announcement effects

for both the target and acquiring companies in all-stock transactions.

SUBJECTS: Finance; Acquisitions, Capital markets, Corporate governance, Financial

instruments, Mergers, Mergers & acquisitions, Securities, Stockholders, Stocks.

3 Case: Lyonnaise des Eaux-Dumez

This case describes the acquisition of Dumez by Lyonnaise des Eux in 1990. The case is
written from the point of view of Suez, a French holding company that is also the most
important shareholder of Lyonnaise. As a holding company, it is supposed to verify that
Lyonnaise does not pay too much for Dumez and that the acquisition makes sense.

TEACHING PURPOSE: The case is used to illustrate the Discounted Cash Flow method
in valuing acquisition targets. It highlights the difference between value creation and
earnings/sales maximization by showing how maximization earnings per share and
maximizing sales are incompatible with value creation.

SUBJECTS: Finance; Mergers and Acquisitions; Water Treatment, Distribution;

Construction

SETTING: France

4 Case: Fenchel Lampshade Company

Describes the proposed purchase of a lampshade manufacturer by Steven and Michele

Rogers, recent graduates of the Harvard Business School. Focuses on their plans to raise
the capital necessary to buy the company. Among the issues raised are how to structure
the deal and whether or not to buy the company.

SUBJECTS: Finance; Entrepreneurial Finance, Entrepreneurship.

SETTING: Chicago, IL

A learning group presentation is required.

5 Case: Risk Arbitrage: Abbott Labs and Alza (A)

A hedge fund is trying to decide whether to capitalize on a seeming risk arbitrage

opportunity that exists during the Abbott Labs acquisition of ALZA.

SUBJECT: Finance, Accounting, Acquisitions, Arbitrage, Commodity markets, Decision

making, Economics, Financial analysis, Financial instruments, Financial management,
General management, Managerial skills, Managers, Mergers & acquisitions,
Pharmaceuticals, Pharmaceuticals industry, Risk, Risk management, Securities markets.

SETTING: Chicago, USA

Hand-out: Risk Arbitrage: Abbott Labs and Alza (B)

Supplements the (A) case.

SUBJECTS: Finance, Accounting, Acquisitions, Arbitrage, Commodity markets, Decision

making, Economics, Financial analysis, Financial instruments, Financial management,
General management, Managerial skills, Managers, Mergers & acquisitions,
Pharmaceuticals, Pharmaceuticals industry, Risk, Risk management, Securities markets.

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SETTING: Chicago, USA

Read: Note on Value Drivers

Presents a framework for analyzing strategic decisions. Takes as given the practice of
value-based management where by managers use value as a primary criteria when
making financial, strategic, or investment decisions. Through a simple valuation model, it
shows how equity value is related to three value drivers--profitability, advantage horizon,
and reinvestment. Also presents a numerical example to illustrate the model as well as
empirical evidence to support the relation between value creation and the value drivers.

TEACHING PURPOSE: Introduces a module on managing growth and creating value.

Should be used in conjunction with cases to illustrate each of the three value drivers
discussed.

SUBJECTS: Finance; Finance; Financial Strategy; Growth Strategy; Investment Analysis;

Profitability Analysis; Resources Allocation; Valuation

6 Case: Kendle International Inc.

Candace Kendle and Christopher Bergen, the CEO and COO of Kendle International, Inc.,
are reviewing ways to finance the growth of their privately-owned company. Kendle is a
contract research organization that conducts clinical drug trials for pharmaceutical and
biotechnology companies. To compete more effectively, Kendle plans to grow through
international acquisitions. It is now time to decide whether to go ahead with a full program
of two European acquisitions, a large debt financing through Nationsbank, and an initial
public offering to repay the debt and provide cash for future acquisitions. The falling stock
prices of Kendle's competitors add pressure to the situation.

TEACHING PURPOSE: To develop skills in designing and implementing an integrated

financial and acquisition strategy.

SUBJECTS: Finance; Acquisitions; Bank loans; Entrepreneurial finance; Financing;

Growth strategy; IPO; Pharmaceuticals industry; Stock offerings

SETTING: Cincinnati, OH / United States

7 Case: Parenting Magazine

Describes a set of decisions confronting Robin Wolaner, who is negotiating with

representatives of Time Inc. about investing in a project to launch a new magazine called
Parenting. The negotiations have reached an impasse. Among the issues to be
considered are the following: 1) How do you assess the opportunity that Wolaner has
identified? 2) How much money does Wolaner need? From whom should the capital be
raised? 3) Is the proposed deal with Time Inc. reasonable? From whose perspective?
What changes, if any, should be made to the deal? 4) What should Wolaner do?

SUBJECTS: Finance, Corporate strategy, Entrepreneurial finance, Entrepreneurship,

Financial strategy, Information industry, Manufacturing industry, Publishing industry.

SETTING: California

Exam

8 Case: Norris Industries

This case concerns the leveraged buyout of Norris, a watershed transaction in which
commercial banks provided the bulk of the acquisition financing. The case affords a
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detailed assessment of the buyout from many standpoints, including: (1) the seller, (2)
commercial banks, (3) mezzanine investors, and (4) equity investors.

SUBJECTS: Finance; Acquisitions; Financial Policy; Leveraged Buyouts; Mergers;

Valuation

SETTING: United States

Read: Technical Note on LBO Valuation (A), and (B)

(A)

Explains the equity cash flow method of valuation as it applies to leveraged buyouts. Also
explains: 1) earnings and cash flow forecasts, 2) debt structure and the cash sweep, 3)
the cashing out horizon and terminal valuation, and 4) the target IRR method of valuation.

SUBJECTS: Finance; Acquisitions, Cash flow, Cash management, Entrepreneurial

finance, Equity capital, Finance, Financial analysis, Interest rates, Leveraged buyouts,
Mergers & acquisitions, Rates of return.

(B)

Explains the equity cash flow method of valuation as it applies to leveraged buyouts. Also
explains how to implement the changing cost of equity method using the CAPM.

SUBJECT: Finance; Acquisitions, Cash flow, Cash management, Entrepreneurial finance,

Equity capital, Finance, Financial analysis, Interest rates, Leveraged buyouts, Mergers &
acquisitions, Rates of return.

9 Case: Societe Generale de Belgique (A)

Handout: Societe Generale de Belgique (B)

This case reviews the positioning of major players in the unfolding hostile-takeover
attempt on Belgium's largest corporation. This episode marked the turning point in
Europe's history of mergers and acquisitions toward an increased emphasis on acquiring
through hostile takeovers. In this case, the student is required to recommend show a
potential "white knight" should respond to the raider's tender offer. (The B case is F-
0882.) A student Lotus worksheet file is available on a computer diskette for use with this
case.

SUBJECTS: Finance; Business Environment; Economic Environment; Financial

Institutions; International Finance; Mergers; Takeovers

SETTING: Brussels, Belgium

Read: Are you paying too much for that acquisition?

Despite 30 years of evidence demonstrating that most acquisitions don't create value for
the acquiring company, executives continue to make more deals, and bigger deals, every
year. There are plenty of reasons why value isn't created, but many times it's simply
because the acquiring company paid too much. It's not, however, that acquirers pay too
high a price in an absolute sense. Rather, they pay more than the acquisition is worth to
them. What is that optimum price? The authors present a systematic way to arrive at it,
involving several distinct concepts of value. In today's market, the purchase price of an
acquisition will nearly always be higher than the intrinsic value of the company--the price
of its stock before any acquisition intentions are announced. The key is to determine how
much of that difference is "synergy value"--the value that will result from improvements
made when the companies are combined. This value will accrue to the acquirer's
shareholders rather than to the target's shareholders. The more synergy value a particular
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acquisition can generate, the higher the maximum price an acquirer is justified in paying.
Just as important as correctly calculating the synergy value is having the discipline to walk
away from a deal when the numbers don't add up. If returns to shareholders from
acquisitions are no better in the next ten years than they've been in the past 30, the
authors warn, it will be because companies have failed to create systematic corporate
governance processes that put their simple lessons into practice.

SUBJECT: Finance; Acquisitions; Corporate governance; Financial strategy; Pricing

strategy; Valuation

10 Case: Rhone Poulenc Rorer

This case considers the unusual terms by which Rhone-Poulenc, the large French
chemicals producer, acquired the US-based Rorer Group, Inc., in August 1990. Set a
year later, in August 1991, the case reviews the terms of the merger and the experience
of the new entity in its first year and invites the student to evaluate the "contingent value
right" (CVR) issued by Rhone-Poulenc in the merger.

SUBJECT: Finance, Acquisitions, Bargaining/Bidding, Forecasting, Hedging, Joint

Ventures, Option pricing

SETTING: United States

Knowledge, Competencies, Skills, Values and Attitudes

Session Knowledge Skills and Competencies Values and Attitudes

1 1) The nature of synergy
2) A rigorous definition of
synergy
2 1) The regulatory
environment surrounding
insider trading
2) The relationships among
prices, trading, and
information
3 The nature of corporate
excellence and value
generation in relation to
strategy
4 The strategic and financial
evaluation of a proposed
acquisition
5 Identification of
incompetitive cost
structures
6 1) The effect of an all-share
acquisition
2) The effect of a high p/e
vs. a low p/e
How to identify the specifications Synergy in mergers and
of synergy acquisitions
Analyzing asset price behavior Balancing corporate
responsibility and
shareholder welfare
Valuation, Value-added analytics, The ethics and
Share price behavior and the economics of greenmail
players' motivations
1) Analysis for value - no Strategic analysis is
incremental tax shields critical
2) Terminal value calculations
1) The valuation of cost synergy The dangers and
2) The exchange ratio challenges of cost-driven
M&As
1) Identification of relevant cash The decision to
flows recommend or not an
2) Calculating the cost of capital acquisition
to use
3) The use of EPS maximization
4) Identification of working capital
required
5) The use of revenue synergy
6) The growth rate assumption in
the terminal value

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7 Strategy and organizational
design
8 Deal structuring in M&As
9 Raising capital to finance
an acquisition
10 Designing an integrated
acquisition and financing
strategy
11 Opportunity assessment
12 How or how not to acquire
professional service firms
13 The form and content of an
acquisition proposal
presentation
14 Evaluation of the economic
sense of an LBO
15 The market for corporate
control
16 The bidding contest for
corporate control
17 Doing the big picture in an
acquisition setting
Organizational analysis in M&As
1) evaluation of attractiveness
2) due diligence
3) EBITDA multiples valuation
4) Earn outs
1) Valuation and pricing
2) Evaluation of the financing
1) the valuation of privately
owned companies
2) evaluation of proposed deals
1) Estimating the financing
needed
2) Evaluation of sources of the
financing
3) Valuation of a buyout option
Post-acquisition integration
problems analysis
Critical analysis of an acquisition
proposal
1) How to use tax shields as
sources of value
2) How to analyze a deal
structure and allocate risks and
returns to players
3) Analyzing the implication of a
declining term structure of interest
rates
4) Valuing warrants
1) The analysis of competitive
situation
2) Identifying the sources of value
in an LBO
3) Assessment of an asset sale
strategy
1) Sorting out a complicated
situation
2) Identifying motives of the
players
3) Evaluation of share prices
1) Industry analysis
2) Company analysis
Mergers, Acquisitions & Analytics
Appreciating the
integration problems
inherent in M&As
How to make sense of
deals
The reasonable price to
pay
Appreciating the
management challenges
of rapidly growing
companies
The difficulties of
launching a new project
and the negotiations
involved
Appreciation of cultural
conflict in acquisitions
1) Formation of
comments relative to a
detailed proposal
2) A learning group will
present this study, and
use the following guide:
3) Explain the analytical
work that underlie the
exhibits
4) Utilize your
knowledge of corporate
finance and what you
have learned so far in
MAA
The M&A and financial
engineering
The appreciation of the
necessity or non-
necessity of an LBO
What is a good bidding
strategy?
How an insider looks at
an acquisition
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3) A strategic and financial

assessment of the deal
4) Organization structure
evaluation
5) Post-merger integration
18 A split-off Cash-and-stock deals The valuation of equity-
linked consideration
19 Deal structuring an Valuation of an exchange option Importance of market
acquisition values of shares in a
stock acquisition

20 How to handle a complex 1) Valuation The integration of

deal 2) Financing strategy
3) Cross-border investment