Post-merger Integration

CORPORATE MERGERS, ACQUISITIONS, AND RESTRUCTURING STRATEGIES (GSM-693) PROFESSOR: OFFICE: PHONE: EMAIL: OFFICE HOURS: MEETING HOURS: MEETING VENUE: Manohar Singh AGSM 307 503-370-6225 msingh@willamette.edu 4.30 PM to 6.30 PM Wednesdays and additional by appointment 6.30 PM to 9.10 PM Wednesdays Room 301 COURSE DESCRIPTION: The course involves analysis of corporate restructuring strategies including mergers, acquisitions, and takeovers, financial re-capitalization, leveraged buyouts, management buyouts, going private, and reorganization under bankruptcy. The course integrates the corporate governance and agency dimensions, financial and strategic management aspects, and legal and accounting considerations into a unified framework for investigating issues such as, pre-merger planning, fact-finding, accounting and tax implications, antitrust problems, post-merger integration, and short-term and long- term shareholder wealth consequences of financial and organizational restructuring transactions. The course combines applied theoretical approach with the case study method through detailed analysis of domestic and global restructuring cases. The focus will be on fundamental concepts of valuation and analytical tools of corporate finance related to restructuring. TEXTS AND COURSE MATERIALS: 1. Robert F. Bruner, Applied Mergers and Acquisitions, (Wiley, 2004): ISBN: 0471-39506-4. 2. A course packet containing a set of case studies and supplemental readings will be used in this course. The course packet will be made available by the instructor. COURSE OBJECTIVE: The aim of the course is for the students to understand the motivations, decision processes, transaction execution, and valuation consequences of financial, business, and organizational restructuring by corporate units. The course facilitates developing ability among students to plan, evaluate, and execute corporate restructuring strategies using financial modeling and quantitative techniques. In addition, objective of this course is to enable students to appreciate the fundamental issues involved in the structure and functioning of market for corporate control within the framework of finance theory. The course is designed so as to create an interface between the academic and the practitioner perspectives of various dimensions of corporate restructuring process CAREER TRACK: The course is aimed at students planning to work for investment banks and corporate advisory firms involved in business restructuring and turnarounds, mergers and acquisitions, and financial reorganization transactions. The course offers a comprehensive strategic perspective, a framework of conceptual and theoretical paradigms, and applied tools for deal design and corporate valuations that may facilitate students establishing their own consulting and advisory services. LEARNING OUTCOMES: At the completion of the course the students will have developed a capability to accomplish the following;  Develop an all-inclusive analytical framework for planning corporate restructuring transactions. o Explain the structure and functioning of market for corporate control. o Identify major market forces generated and corporate specific opportunities for creating value through corporate restructuring transactions. o Evaluate the objectives and motivations of various stakeholdersshareholders, managers, bondholders, employees- behind restructuring activities. Explain various legal and regulatory provisions as they impact the choice and performance implication of various restructuring transactions. o Evaluate available alternatives- deal structures and terms- for various corporate combinations to achieve positive value consequences given the US and global regulatory parameters. o Analyze implications of tax, fair trade practices, and securities laws for deal design and implementation. o Be able to design a “Win-Win” deal for both the parties involved in a corporate combination transaction. Be able to conduct valuation of the mergers, acquisitions, and corporate divestitures. o Use due diligence process to identify and strategically evaluate a target or an acquisition offer. o Apply various valuation methodologies to quantify the financial impact of restructuring transactions. o As an acquirer, conduct comparative valuation of various targets to arrive at different offer price scenarios. o From a target perspective, apply well accepted finance concepts like riskreturn trade-off, cost of capital, capital structure, equity risk premium, and CAPM framework to evaluate acquisition proposals. o Quantify value implications of various financing alternatives and payment methods.         Be able to design and implement restructuring transactions. o To be able to utilize forecasting tools to quantify future cash flows and capital needs. o To be able to identify and estimate value of operational, financial, and managerial synergies and incorporate those into the deal value calculations. o Demonstrate knowledge of deal negotiation process and deal documentation. o Be able to prepare a “PITCH BOOK”. o From an investor perspective, be able to negotiate with other players preand post-deal structuring. o Identify and resolve conflicting issues in the target/acquirer relationship. Analyze various corporate governance structures and agency conflicts and their implications for corporate investors and hence market value of the firm in question. o Identify variety of exit modes for incumbent managements and boards of target firms. o As an acquirer, design various takeover tactics in a manner so as to minimize value loss to either the target, or the acquirer or the combined post-merger entity. Be able to minimize adverse impact of takeover defense provision in the target firm. o As a target, evaluate and redesign existing takeover defense mechanisms to maximize positive value consequences of a particular deal. Design and implement going private/ leveraged buyout transactions including being able to identify alternative sources of capital and planning post LBO reorganization plan. Explain various factors leading to financial distress and be able to evaluate alternatives available to restore to financial health. Evaluate Pros and Cons of Chapter 11(Reorganization) and Chapter 7 (Liquidation) restructuring options and their wealth consequences for various stakeholders in the firm. Be able to analyze financial and legal aspects unique to cross-border restructuring transactions and incorporate those aspects into deal design and implementation. STUDENT RESPONSIBILITIES: Each student should come to class prepared to discuss the assigned material. I strongly recommend that the students read the relevant text/material prior to every lecture. I will expect students to actively participate in the class proceedings. Part of your final assessment will be based on participation in the class discussions. You should also be conversant with current mergers and acquisitions and financial restructuring news from The Wall Street Journal, Business Week, and other financial press sources as they relate to course topics and be prepared to discuss them in the class. I strongly recommend regular attendance in the class. Part of the participation grade will reflect how regularly a student has been attending the classes. Academic dishonesty will be dealt with in accordance with the Willamette University provisions. Headphone and cell phone use in the classroom is prohibited. GRADING: 1. 2. 3. 4. Group Presentations (2 Cases for Each Group) Group Pitch Book Project Individual Case Write-ups (10) Class Participation GRADE DISTRIBUTION (%): > 90.5 A 87.5 - 90.49 A84.5 - 87.49 B+ 81.5 - 84.49 B 78.5 - 81.49 B70.5 - 78.49 C 30% (15% Each)* 30% ** 20% (2% Each) 20% <70.49 Let’s not go there * Of the 15%, 10% grade will be assigned by me and 5% will be peer evaluation by your group members. ** Of the 30%, 20% grade will be assigned by me and 10% will be peer evaluation by your group members. GROUP CASE PRESENTATIONS AND DISCUSSIONS: There are thirteen cases in the course. I will present and lead the first 2 case discussions. There are 10 cases to be presented by student groups. There will be 5 groups of 4 students each. Each group will present 2 cases. By 5.00PM on the day prior to the class, the student group responsible for the particular case presentation, should provide a brief (4 pages at the most-may attach appendices for additional information in tables and exhibits etc.) case write-up summarizing their analysis. INDIVIDUAL CASE WRITE-UPS: Students that are not leading the particular case discussion would write up 2-page case summary (make sure it is not a rehash of the facts already given in the case but provides your individual analysis and highlights your recommended course of action). These are also due by 5.00 PM on the day prior to a particular case discussion. Thus, each individual student will provide a total of10 two-page case write-ups for the cases for which his/her group is not the presenter group. Each individual write-up is worth 2% of the final grade-with a total of 20% grade being assigned to the 10 individual case writeups. A good write-up would put a case discussion within the context of overall theoretical and applied discussions throughout the course and synthesize rather than restate major issues raised within a case. GROUP PROJECT: The Acquisition Proposal (PITCHBOOK) Student groups act as consultants advising a client on a potential acquisition. Each student group is responsible for crafting an acquisition proposal and preparing what is typically called a “Pitchbook”. The proposal should offer comprehensive analysis of the strategic and financial rational behind the proposed transaction within the overall mission of the acquiring firm. Your client (the acquirer) may be any actual U.S. company. You may choose any U.S. entity as the designated target as long as you provide a justification as to that firm being the best fit-strategically and financially- target for your acquisition. The proposal will be presented and defended within the class setting on 4/26/06. Student groups will be evaluated based upon the presentation and write-up components of the Pitchbook. Your Pitchbook should have the following broad structure: Strategic: 1. Explain the strategic positioning of your acquiring client and provide justification for this particular acquisition as a value enhancing course of action. 2. Explain the choice of the proposed target firm as the best-fit acquisition consistent with the strategic positioning of your client. Highlight the proposed post-acquisition opportunities to generate value for your client? Due Diligence and Valuation: 1. Explain the due diligence process to be followed to make an informed choice considering firm-specific and macro factors having bearing on the proposal. 2. Provide details of the target governance and financial structure and discuss their implication for your bid. 3. Provide information on relevant legal issues if any that may have bearing on the proposed deal.(Think Antitrust especially) 4. Provide valuation of the target as a stand-alone entity 5. Provide valuation of possible synergies or competitive advantages arising out of the combination to arrive at expected post-acquisition valuation. 6. Explain the choice and demonstrate the correct application of appropriate theoretical principles and analytical tools for arriving at the fair valuation of the target. Approaching the Target: Provide a detailed proposed approach to target and the proposed deal structure a. Friendly meeting to discuss a merger or a formal tender offer or a hostile bid without consulting target management b. Mode of financing and payment c. Provide a range of possible offer prices if there is a possibility of multiple bids. Post-acquisition Integration Strategies: Provide information on fundamental issues critical to a successful post-acquisition integration plan. The Pitchbook should not exceed 20 pages. You may provide the details of the valuations in an appendix. Also, in the appendix you may include a summary of the target’s recent past financials. You should spend enough time in identifying your client (the acquirer) and the proposed target so that your strategic reasoning for the merger is easily justified. Sources of Pitchbook information: Following are some relevant pages in Applied Mergers and Acquisitions for the Pitchbook preparations. • Pages 883-4: Communicating the concept proposal to senior management of the buyer (internal only). • Pages 184-195: Some principles of acquisition search. • Pages 207-228: Due Diligence. • Pages 914-925: Corporate development as a strategic capability. Additional Reading: THE M&A “PITCH BOOK”: Proposed Acquisition of Heller Financial by United Technologies Corporation. DESCRIPTION OF THE CASES INCLUDED IN THE COURSE: 1. CONRAIL-1: Description: On October 15, 1996, Virginia-based CSX and Pennsylvania-based Consolidated Rail (Conrail), the first and third largest railroads in the eastern United States, announced their intent to merge in a friendly deal worth $8.3 billion. This deal was part of an industrywide trend toward consolidation and promised to change the competitive dynamics of the Eastern rail market. Shareholders must decide whether to tender shares into the front-end of a two-tiered acquisition offer. To make this decision, they must value Conrail as an acquisition target and understand the structure of CSX's offer. 2. CONRAIL-2 Description: Eight days after CSX announced it was going to buy Consolidated Rail (Conrail) for $88.65 per share, Norfolk Southern made a hostile $100 per share bid for Conrail. Over the next several months, the potential acquirers upped their bids while exchanging criticism in the popular press, prompting analysts to call this one of the nastiest takeover battles of the 1990s. The case is set in January 1997, just before Conrail shareholders are scheduled to vote on the proposed deal with CSX. It analyzes the trend toward consolidation in the U.S. railroad industry, the bidding war for Conrail, and the various provisions in Pennsylvania's anti-takeover laws, which restrict the market for corporate control. It also explores the strategic and financial implications of a bidding war and challenges the assumption that failure to acquire is a zero net present value endeavor. Finally, it examines the nature of and economic basis for regulating the market for corporate control. 3. AOL-TIMEWARNER MERGER: Description: On January 11, 2000, AOL and Time Warner announced their intention to merge, creating what AOL CEO Stephen Case and Time Warner CEO Gerald Levin called the 21st century's first fully integrated communications, entertainment, and media company. This case enables in-depth analysis of the value of AOL Time Warner from the viewpoint of executives and analysts before their merger six months later. 4. THE M&A “PITCH BOOK”: Proposed Acquisition of Heller Financial by United Technologies Corporation. This technical note offers an example of a thoroughly complete "pitch book" for use as a basis of class discussion and learning. Actual pitch books are almost never made available for public use. This presentation, however, was prepared by a group of Darden students in April 2001 for a jury of M&A executives of United Technologies Corporation-- they judged this work to be of excellent quality, among the best they had seen in any setting. A separate validation of the deal concept is given in the final exhibit, which records the announcement on July 30, 2001, by General Electric of its acquisition of Heller. In reviewing this document, the task for the student is to assess both its form and contents, from the standpoints of both the presenter and audience. Why is each exhibit and section included in the document? What analytical work underpins the exhibits? What might explain the presentation format? What oral comments might one make in supporting this presentation to a group of executives? 5. THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A): Strategy and Valuation. Description: In 2002 a money manager is considering how to vote her shares in Hewlett-Packard on the proposal to merge with Compaq. The (A) case presents information about the strategic and financial motivations of the merger. Included are completed valuations of both HP and Compaq and detailed summaries of the leading advocate (Carly Fiorina) and critic (Walter Hewlett). The tasks for the student are to value the prospective synergies in the deal and critically assess the strategic arguments (pro and con). 6. THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B): Deal Design Description: The (B) case affords a detailed examination of the terms of the proposed merger. The tasks for the student are to critically assess the specific design of the deal and its impact on shareholders. Of particular interest are the impact on earnings per share (that is, EPS dilution), the governance of the new firm and whether this is, indeed, a merger of equals. 7. THE HILTON/ITT WARS Description: This case provides a vehicle for discussing analytical approaches to understanding bidding strategies in a hostile-tender-offer setting. In 1997, Hilton Hotels Corporation offered to acquire ITT Corporation in an unsolicited tender offer. ITT resisted in several ways. At the date of the case (July 17, 1997), ITT announces a restructuring of the firm aimed at delivering about $70 a share to its shareholders. The task for the student is to understand why Hilton's takeover attempt has failed thus far, and what the possible responses might be at this stage. The case contains a completed valuation analysis of ITT which suggests that ITT is worth, at most, $89 a share to Hilton. In preparing a possibly higher bid for the firm, the student must weigh the probability of another bidder's entering the fray and that competitor's bid price. 8. THE WHITE KNIGHT: UNITED BRANDS CORPORATION Description: The case --part of a series of cases that simulate a hostile-takeover attempt involving four companies in January 1997-- focuses on the white-knight firm, which has had amicable relations with the target company in the past and is considering making a friendly bid for it. This exercise is ideally suited to (1) hone valuation and negotiation skills, (2) train in the unusual dynamics of hostile takeovers, and (3) develop an understanding of some fundamental points of corporate governance, including the responsibilities of a board of directors and the agency problems that can arise when managers' jobs are threatened. 9. TAKEOVER! J.P. Hudson & Co. / Hudson Guaranty Bank Description: This case extends case 8 takeover simulation exercise to include a role for a bank. In this case students represent a lender/investment banker, from whom bidders must obtain financing. The target is an underperforming conglomerate with two principal business segments: consumer foods and specialty chemicals. The raider company has a history of hostile action, usually profiting from greenmail or the bust-up liquidation of the unfortunate target. Two other bidding parties are present: a white-knight firm that has had amicable relations with the target in the past and considers making a friendly bid for the target, and an LBO firm that has ample equity and lines of credit to finance a buyout. 10. CROSS-BORDER TRANSACTIONS: VODAFONE- MANNESMANN: Description: Vodafone's bid for Mannesmann was the largest ever cross-border hostile bid. This case examines the economic, financial, and corporate governance issues in the deal. 11. RJR-NABISCO Leveraged Buyout-1: Description: The case gives students the opportunity to explore issues facing the board of directors in a leveraged buyout. RJR Nabisco is valued under different operating strategies and the source of gains in leveraged buyouts is stressed. 12. RJR-NABISCO Leveraged Buyout-2: Description: The case describes the situation facing RJR Nabisco one year after the leveraged buyout by Kohlberg Kravis and Roberts. This is an exercise in analyzing the financial restructuring of a highly leveraged, but operationally healthy, company. 13. USX CORP: Description: A large diversified steel and energy firm is pressured by a corporate raider to spin off its steel business in order to increase its stock price. As an alternative to the spin-off, management proposes replacing the company's common stock with two new classes of "targeted" stock that would represent separate claims against each business segment's cash flows, allowing the stock market to value each business separately. 14. MARVEL ENTERTAINMENT GROUP: Description: Marvel Entertainment Group is the leading comic book publisher in the United States, with superheroes like Spider-Man, the Incredible Hulk, the X-Men, and Captain America. It is also one of the leading manufacturers of sports and entertainment trading cards under the Fleer and Sky Box brand names. In the mid-1990s, it experienced sharp declines in both businesses, causing it to file for bankruptcy in December 1996. This case is set in late January 1997, shortly after Marvel filed its reorganization plan with the bankruptcy court and approximately one month before creditors will have to vote on the plan at the confirmation hearing. Two of the most prominent corporate raiders of the 1980s are pitted against each other for control of the company. On one side is Ronald Perelman, who controls Marvel through his MacAndrews & Forbes holding company. On the other side is Carl Icahn, who controls 25% of Marvel's public debt. Icahn and the other bondholders must decide whether to accept Perelman's plan, to reject it in favor of their own plan, or to sell their bonds before the confirmation hearing. Perelman must decide whether to change the plan in response to the debtholders' threats or to wait and see what happens at the hearing. Course Time line: Week Date Topic 1 Jan 18 Introductory Overview: Theoretical frameworks, historical trends, M&A motives, and types of mergers. 2 Jan 25 Strategy and the Origination of Transaction Proposals. Locating Opportunities. 3 Feb 1 Strategy, Valuation, and Deal Design and the Origination of Transaction Proposals 4 Feb 8 5 Feb 15 6 Feb 22 7 March 1 Rules of the Road: Due Diligence and Due Diligence and Deal Structure and Governance, Valuation Valuation Terms Laws, and Regulations Case Technical Note: A Sample Pitch Book. Proposed Acquisition of Heller Financial by United Technologies Corporation. Class Handout:Pack-1 Bruner Chapter 3: Does M&A Pay? Background Readings: Chapter 4: M&A Activity Chapter 5: CrossBorder M&A In-Class Discussion: Chapter 7: Acquisition Search and Deal Origination Chapter 18: An Introduction to Deal Design in M & A Chapter 25: How a Negotiated Deal Takes Place 2 Cases: Singh The Merger of Hewlett-Packard and Compaq: (A): Strategy and Valuation and (B): Deal Design Background Readings: Chapter 29: Documenting the M&A Deal In-Class Discussion: Chapter 26: Governance in M&A Chapter 27: Securities Law, Issuance Process, Disclosure, and Insider Trading Chapter 28: Rules of the Road: Antitrust Law Background Readings: Chapter 8: Due Diligence Chapter 16: Accounting For M&A In-Class Discussion: Chapter 9: Valuing Firms (Refresh) Chapter 11: Valuing Synergies Chapter 15: Valuing Liquidity and Control 2 Cases: 1.Conrail-1(G-1) 2. AOL TimeWarner Merger (G-2) Reading Background Readings: Chapter 10: Valuing options (Refresh) In-Class Discussion: In-Class Discussion: Chapter 19: Choosing the Form of Acquisitive Reorganization Chapter 20: Choosing the Form of Payment and Financing Chapter 23: Risk Mgmt. in M&A Week Date Topic 8 March 8 Hostility and Multiple Bidding 9 March 15 10 March 22 11 April 5 12 April 12 13 April 19 14 April 26 Financial Leverage Buyout Restructuring and LBOs 2 Cases: 1. The Hilton/ITT Wars (G-3) 2. VodafoneMannesmann Hostile bid (G-4) 2 Cases: Case: Conrail-2 1. The White (Just Read) Knight: United Brands Corp (G5) 2. Takeover! J.P. Hudson & Co. / Hudson Guaranty Bank (G-1) Background Reading: Chapter 13: Valuing the Highly Levered Firm and LBO Issues. In class Discussion: Chapter 34: Leveraged Restructuring Class Handout: Pack-2 (WMM) 2 Cases: 1. RJR-NABISCO LBO-1 (G-2) 2. RJR-NABISCO Leveraged Buyout-2 (G-3) Restructuring in Divestitures Financial Distress 2 Case: 1. Marvel Entertainment Group (G-4) 2. USX CORP (G-5) PICHBOOK PRESENTATIONS Case Reading Background Readings: Chapter 31: Auctions in M&A In-Class Discussion: Chapter 32: Hostile Takeovers Chapter 33: Takeover Attack and Defense Chapter 12: Valuing the Firm across Borders The following two readings are the relevant background readings for the for the next week presentations. Class Handout: Pack-3 (GGN) Restructuring in Financial Distress Class Handout: Pack-4 (DEM) Divestitures