Mergers, Acquisitions, and

Other Corporate Restructuring Activities

MBAF 624 Course (40962) Syllabus-Fall 2005

Monday: 7:15 to 10:00 P.M., Hilton 023

Instructor:

Name: Don DePamphilis, Ph.D.

Office: Hilton 210

Phone: 310-338-7415

E-mail: (easiest way to contact) or

Office Hours: Mondays 4:00-7:00 P.M.; Wednesdays 1:00-4:00 P.M.; or by appointment.

Course Overview:

Learning Objectives: Students will

  1. Investigate what corporate restructuring is and why it occurs;
  2. Evaluate the impact of the regulatory environment on M&A activity;
  3. Analyze how value is created (or destroyed) as a result of corporate mergers, acquisitions, divestitures, spin-offs, etc., through in-depth analysis of how to “do a deal.”;
  4. Assess how risks associated with the various approaches to creating value can be identified and managed;
  5. Evaluate commonly used takeover tactics and defenses;
  6. Apply a process for selecting appropriate takeover tactics depending upon the types of anti-takeover defenses in place at a target company;
  7. Deduce how and when to apply valuation techniques under special circumstances;
  8. Assess the practical limitations of the various valuation techniques;
  9. Investigate the importance of understanding assumptions underlying business valuations;
  10. Apply a highly practical “planning based approach” to managing the acquisition process;
  11. Evaluate challenges associated with each phase of the M&A process from developing acquisition plans through post-closing integration;
  12. Investigate the advantages and disadvantages of alternative deal structures;
  13. Investigate how the various components of the deal structuring process interact to determine price;
  14. Analyze how to manage the deal structuring process to minimize the risk that a business combination will not meet expectations;
  15. Evaluate advantages and disadvantages of alternative ways to exit businesses;
  16. Apply financial modeling tools to evaluating mergers and acquisitions;
  17. Apply the many tools and skills that have been learned in this and other courses in an integrated manner in completing an acquisition; and
  18. Investigate alliances/joint ventures as alternatives to mergers and acquisitions.

Description: The course is divided into two discrete sections: (1) developing an in-depth understanding of how and when to apply the appropriate tools and skills to successfully complete a transaction and (2) the application of what has been learned to solving “real” world business problems. All major elements of the acquisition process will be discussed in the context of a logical process. The course will involve the application of what the student may have learned in such courses as finance, accounting, business law, micro and macroeconomics, management, negotiation, new ventures, entrepreneurship, strategic planning, and business policy/organization.

As part of pre-class preparation and in-class discussion, students will be asked to solve both quantitative and qualitative problems and to analyze both publicly traded and privately owned companies involving valuing synergy, control premiums, and leveraged buy-outs. Illustrations will include practical ways to evaluate IPOs, new ventures, and internet-related companies.

Students will be asked to form acquisition teams to develop highly realistic business and acquisition plans that could be used to convince top management of an acquiring corporation, a venture capital firm, or a lender to fund their proposal. The focus will be on how to effectively manage the process. As a key part of the learning experience, the course will require primary research to obtain the necessary data to develop the acquisition plan, working within teams, and the development of project management skills. The professor will illustrate how the process works in practice by drawing upon his personal experience in managing more than 30 acquisitions, divestitures, alliances, joint ventures, equity partnerships, minority investments, and licensing arrangements from the planning through implementation stages.

The professor will frequently relate concepts discussed in class to transactions currently in the news to illustrate their application and limitations.

Who should take this course?: Those who are seeking to become entrepreneurs, financial analysts, chief financial officers, operating managers, investment bankers, business brokers, portfolio managers, investors, corporate development managers, strategic planning managers, bank lending officers, auditors, venture capitalists, business appraisers, actuaries, corporate attorneys, or who simply have an interest in the subject.

Prerequisites: The course presumes that students have knowledge of basic accounting, economics, and financial management concepts and tools. Students should have had at least one course in accounting, finance, and economics within the last two years or relevant work experience.

Required Text: Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, 3rd edition, Donald M. DePamphilis, Elsevier/Academic Press, San Diego, Ca., 2005. The text will be referred to as DePamphilis throughout this syllabus.

Other Required and Optional Reading: Unless otherwise noted, the textbook contains all case studies required for this course, except for the following, which are available on Blackboard:

BigCo Acquires Upstart Corporation

Financing LBOs: The SunGard Transaction

Forecasting Business Performance

Illustrating the Free Market Process of Creative Destruction: Consolidation in the Telecommunications Industry

News Corp Acquires Stake in Hughe’s DirecTV

P&G Buys Gillette

Valuation Methods Employed in Investment Banking Fairness Opinions (Optional)

Computer skill requirements: Students will need to know how to use spreadsheet software (e.g., Microsoft Excel) no later than the fourth class meeting.

Grading: Students will be evaluated in five different ways:

Grade Points:

Examination (2 exams—100 points each) 200 points

Acquisition Team Project (see discussion below)1 250 points

Peer Review (see discussion below) 25 points

Problem Set 50 points

Class participation (see discussion below) 75 points

600 points

1Team project leaders have the potential to earn an additional 20 points based on an anonymous review of their performance by other team members.

Final letter grades will be assigned according to the following point scale:

A 576 - 600

A-  555 - 575

B+ 540 - 554

B 500 - 539

B- 490 - 499

C 450 - 489

D 425 - 449

F < 425

At the end of the year, the professor reserves the right to lower the scale in the student’s favor.

Assignments will not be accepted after their due date, which is defined as the end of the class on the day on which they are due. If the student is unable to attend a class, the student is expected to send the instructor the assignment via e-mail no later than the due date. Make-up examinations will be given only in cases of verified illness or death in the immediate family. The best way to contact me is through e-mail (see first page for address).

Students are encouraged to ask the professor at any time for an “informal” evaluation of how they are doing in the class.

Class Participation. Learning to speak clearly and succinctly on an impromptu or informal basis in large groups is an essential skill that needs to be developed in whatever career the student pursues. In the workplace environment, we are often judged as much by what we don’t say as by what we do. Under no circumstances will a student have to feel concerned about being embarrassed in front of their classmates. In-class discussion will always be treated in a professional, non-threatening manner.

In the absence of active participation, the professor will call on students. Active participation is defined to include both questions and comments. To receive the maximum number of points in this category, the student will be expected to participate during every class by asking questions or by making thoughtful comments. The quality of both questions and comments will receive greater weight than frequency in determining the final participation point score. Obviously, the student must attend most of the classes in order to get the maximum number of points.

Acquisition Team Project: Early in the term students will divide into “teams” of four-to-six students each to share the research, analysis, and field work required to design a viable corporate acquisition proposal. The purpose of the Acquisition Project is to give students the opportunity to apply the tools they have learned in an increasingly common situation, i.e., mergers and acquisitions.

Each team will be asked to represent an acquiring company or investment group whose business strategy involves an acquisition or merger. The acquiring and target firms must be in the same industry. The acquisition can involve a recent transaction (i.e., last 12 to 18 months), a current transaction, or a hypothetical transaction involving two publicly traded firms, private companies, or some combination. The use of publicly traded companies will facilitate data collection, and the selection of companies in the same industry will simplify the analysis by eliminating the need to analyze two different industries.

Selecting Companies to Study: The success of the Project will be greatly dependent on the Team’s ability to understand the company’s operations, products, and the competitive dynamics of the industry in which it competes and to obtain financial, technical and market-related information on the company. Teams are encouraged (but not required) to select a publicly traded company, because both internal financial and operating data, as well as market/industry data, is likely to be more readily available (e.g., through Disclosure, Value Line, Standard & Poors Corporate Register, Thomas Register, etc.) than for a privately owned firm.

It is helpful, although not essential, that the acquiring companies, target companies, or corporate divisions you evaluate be located in Southern California. This would enable teams to interview key corporate personnel to obtain additional information. Keep in mind that detailed financial information on publicly traded companies is likely to be available only on a consolidated basis. Consequently, efforts to obtain detailed financial information on a specific operating division of a diversified publicly traded company are likely to be very frustrating.

While there are no restrictions on the size and type of company you select, I suggest that teams select relatively small, uncomplicated businesses such as single product, independent companies or operating units within larger companies. For those teams that choose to select privately owned companies here in Southern California, small companies, particularly those that are considering “going public” or attempting to obtain additional funding from venture capitalists, may be more receptive to cooperating with your team. Contacting the president, general manager, or chief financial officer of the company or division is a good place to start. Commercial and industrial parks (e.g., the Irvine Spectrum in Irvine, California) offer dozens of potential candidates for your analysis.

For those that choose a private company, assure management that they will be provided with a final report and presentation in order to more readily obtain the necessary information. Emphasize to senior management that the report will contain a recommendation(s) of how to increase the “going concern” value of their business and a valuation of the business. Also emphasize that the results of the study and any information that they provide to your team will be kept confidential.

Students should not consider financial services companies such as banks, insurance, or leasing companies as we will not be discussing how to deal with these types of firms. Furthermore, it is recommended that students not select airlines due to the extensive use of equipment leasing, which create challenges not adequately addressed in the course.

If students choose to evaluate a recent transaction, they must address the key elements of the acquisition as outlined below as if the transaction had not taken place. However, based on their analysis, they must be able to answer the question of whether the acquiring firm overpaid, underpaid, or paid “fair market value” for the target firm and why. This may require that the Team undertake several activities or evaluate options that may not have actually been undertaken by the acquiring company. In this instance, the Team must determine and justify what it considers to be appropriate terms and conditions for the transaction. Alternatively, the Team must vigorously justify the actual terms and conditions of the transaction.

Students are encouraged to consult with the Professor about selecting a “Target” company early in the selection process if there are questions about the appropriateness of a potential Target. The Professor will have final approval of the companies to be used in the Acquisition Project.

In the past, students have developed business plans for their own companies (both public and private) and for a business they were planning to start. The latter option represents an excellent opportunity to get input from both the Professor and other students.

Each acquisition team is encouraged to develop mission statements, strategies and action plans that are different from what the selected company may be saying publicly if the team feels that this is appropriate.

The Acquisition Team Project will be completed by each team submitting both the Word documents and Excel spreadsheets to the Professor in both hard copy form and on a CD ROM. The cover page should indicate the team members and the section(s) each member was responsible for completing, e.g., Julie Chang completed the financial statements for the acquiring and target companies, David Martino and Leslie Van Houton were responsible for developing the business strategy, etc.

Acquisition Team Project Business and Acquisition Plans: Each team will submit a business plan, which includes an acquisition plan, not to exceed 50 pages including supporting financial tables. The acquirer’s business plan should include the following elements:

Introduction

  1. Executive Summary: In 1-2 pages, describe key objectives, why an acquisition is preferable to alternative options such as a “go it alone” venture or alliance, why the recommended target is more attractive than other potential target firms, the amount and composition of the initial offer price, how it will be financed, and key risks associated with the transaction.

Business Plan (for acquiring firm)

1.  Industry/market definition: Define the industry/market in which the target firm competes in

terms of size, growth rate, product offering, and other pertinent characteristics.

  1. External analysis: Describe how the interaction and relative bargaining power of customers, competitors, potential entrants, product/service substitutes, and suppliers determine industry cash flow and profitability. Profile the industry/market using the “modified Porter framework” discussed in Chapter 4 (Figure 4-3) in DePamphilis (pp. 130-145).
  2. Internal analysis: Describe the acquiring company’s strengths and weaknesses and how they compare to the competition.
  3. Opportunities/threats: Discuss major opportunities and threats that exist because of the industry’s competitive dynamics.