THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO
Joseph M. Bryan School of Business and Economics
Master of Business Administration Program
MERGERS AND ACQUISITIONS− MBA 683-11
Fall 2008
Professor John Englar
Bryan office 344E
e-mail:johnenglar@aol.com
(336)272-3802 (Home)
(336)549-3169 (cell)
(336)334-4318 (Bryan)
Note: I will rarely be in the Bryan office or use UNCG email. Best communication with me
will be the aol email address.
Required Texts: Case Packet Available in the MBA Office, 220 Bryan, including Balbirer
monogram.
Purpose: MBA 683 is designed to provide students with an understanding of the implementation of corporate strategy via corporate mergers and acquisitions. Upon completion of this
course, students should be equipped to:
1. Identify the different ways businesses can be acquired and indicate the circumstances under which each might be appropriate.
2. Assess a merger/acquisition in terms of it meeting a firm’s strategic objectives.
3. Value a merger/acquisition from an economic perspective. Evaluate a merger’s synergies
and tax consequences, and how these factors might impact the organizational structure of
both the target and acquiring firm.
4. Understand the regulatory and corporate governance constraints on merger transactions,
and how Boards/managers must consider these elements in implementing M&A transacttions.
Course Requirements: A student’s final grade will be based on two case write-ups, class
participation and a term paper. The relative weight of each component is as follows:
Case Write-up #1
Case Write-up #2
Class Participation
Term Paper
25%
25%
10%
40%
You are expected to read and understand all cases. Write-ups may be prepared on any two of
the following cases; MRC (A), Cooper Industries, Yeats Valve and Controls, Brown-Forman
Distillers Corporation, Chrysler/Daimler, Eskimo Pie Corporation, the John Case Company,
and Philip Morris Company/ Kraft, Inc. Anheuser Busch may not be used. To insure that you
deal with a range of issues over the course of the semester, at least one case must be turned in
during the first four weeks of the semester. Write-ups should be individual efforts and are to
be turned in on the evening of class discussion. Typically, a write-up should be between 5 and
10 typed pages, exclusive of exhibits. Each case write-up should contain (at a minimum)
some discussion of (1) the degree to which the proposed target serves the acquiring firm’s
strategic objectives, and (2) any valuation issues that appear to be relevant in the setting of the
merger/acquisition terms (using attached exhibits to demonstrate your calculations). See
summary at end of syllabus.
Class participation is an important and will count for 10 percent of your final grade. Beyond
the day-to-day participation, you may be asked to present orally in class one of your
case write-ups (one student selected randomly for each case). You may also volunteer to
make a presentation at the end of the course discussing your merger analysis project described
below.
Finally, students will be asked to complete a term paper on any merger listed in the project
description at the end of the syllabus (or any other transaction of your choice, provided you
clear it with the instructor and adequate financial information is available to complete the requirements). The paper should be no longer than 25 pages exclusive of exhibits. The paper is
due on three days before the last class so that it is a good idea to begin the research as soon as
possible. You must identify your choice of transaction by class on Nov. 7.
A few final notes: First, beyond the cases (and a limited number of handouts), there is no required text for the class. Instead, Professor Balbirer has put together a lengthy paper dealing
with the strategic and valuation aspects of mergers and acquisitions. This will be included in
the class materials. Students who wish to get a copy sooner, can simply e-mail Professor Balbirer and he will send you an electronic copy. If you are uncomfortable without a text, he can
suggest a few $130 comprehensive texts on the subject that you can buy.
Second, MBA 620 (Competitive Analysis and Strategy Formulation) and MBA 625 (Creating
Value Through Financial Policy) are prerequisites for this course.
Third, students are expected to be familiar with and to abide by the University’s Honor Code.
You should submit all written work with a signed statement to that effect.
SESSION ASSIGNMENTS
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Session 1, Oct. 24
We’ll use this class period to accomplish two things: first, we will discuss paths to corporate
growth and the choices managers face. After discussing the role of acquisitions in this strategic thought process, we will review what you have hopefully learned about various valuation
methodologies. We can use the Daimler Chrysler case for both purposes.
Note: It is imperative that you review and have command of the concepts in Sections 3
and 4 of Prof. Balbirer’s monogram before coming to this class. If not, you will be playing “catch up” throughout the course.
The Chrysler/Daimler case raises a host of issues which opposing management teams and advisors had to address. We will use the case to examine strategy failures and to review
valuation techniques. In preparing the case, consider the following questions:
1.
What situation(s) face each company? How would you evaluate the strategic
needs/options of each? Why would a merger, versus other options (such as an alliance as proposed by Nissan to General Motors) solve these needs?
2.
What methods would you use to determine a range of values for each company.
What are key value drivers? Use your estimates to set a proposed share exchange ratio. What would this do to future reported earnings per share? How should the
market value a merged company?
3. Prepare a specific recommendation for the structure of a combined company,
addressing the structural and “cultural” issues set forth in the case. Explain
your reasons.
4.
Evaluate the risks to success for each company in a proposed merger.
5.
Be aware that this case is often used as a negotiation simulation, and that there are
lessons in this regard for us to examine in class.
Session 2, Oct. 31
Throughout the next three sessions, we will look intensely at valuation options and critical
decisions and techniques raised in the cases. We will also examine corporate structures used
to effect transactions and the role of key agreements.
We’ll begin this session with a look at the Brown-Forman Distillers Corporation (BFD) case.
The decision problem facing the CEO of BFD is whether to buy Southern Comfort at the asking price of $94.6 million. While financial considerations play a role in the decision, there are
issues of strategic fit and product positioning which should emerge as issues for class discussion. While preparing the case, please consider the following questions:
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1. Identify the key competitive characteristics of the distilling industry. How has BFD attempted to position itself within this industry? Does its strategy appear to be working well?
2. Assess the proposed acquisition in terms of strategic fit.
3. Brown-Forman is assuming that a 14 percent cost of capital for this acquisition. Is this a
reasonable number? There’s data in the case to test this figure – do some calculations!1
4. How much is Southern Comfort worth? What are the key assumptions in valuing this acquisition? In particular, how much of Southern Comfort’s worth is associated with the
estimate of the firm’s terminal value? How does product positioning play into all of this?
5. What should BFD do?
____________________________
1. To calculate the cost of capital, you will have to calculate the cost of equity capital. The case writer has provided two estimates for the market risk premium; one based on an arithmetic average, the other on the geometric
mean. Use the arithmetic mean.
For the latter half of this period, we will examine the Eskimo Pie Company case. Eskimo Pie
is a marketer of branded frozen novelties. The company is owned by Reynolds Metals, a maker of a wide range of aluminum products. Reynolds wants sell its stake in Eskimo Pie so that
it can focus on its core aluminum business.
The Eskimo Pie case presents students with a corporate decision that depends on a (relatively)
simple valuation of a firm. The valuation can be approached using a discounted cash flow
analysis or by using a variety of comparable public firms trading multiples. The managerial
issues in the case focus on the ability of Eskimo Pie to successfully complete the proposed
offering at a “fair price.” In this respect, the valuation aspects of the case are much like initial
public offerings. As you prepare the case, consider the following questions:
1. What is your estimate of the value of Eskimo Pie Corporation (EPC)?
2. Why would Nestle want to acquire EPC? Are there potential synergies? Is Eskimo Pie
worth more to Nestle than it is worth as a stand-alone company?
3. As an advisor to Mr. Reynolds, would you recommend the sale to Nestle or the proposed
initial public offering? What non-economic/ value factors should be considered?
Session 3, Nov. 7
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We will use the cases in this session to continue our examination of valuation methodologies
and other factors impacting acquisition success.
In the first part of the session we will take a look at the Yeats Valve and Control, Inc. case.
Your task as students is to value Yeats Valve from the perspective of TEI International as
well as setting the terms of the acquisition under the assumption that TEI will pay for Yeats
through an exchange of stock. As you prepare the case, consider the following questions:
1. What is the situation faced by both Yeats Value and TEI International? What are their
relative competitive strengths and weaknesses? Why should each of these companies
want to negotiate a merger?
2. How much is Yeats Value worth per share? What appear to be the key assumptions
in establishing the value of Yeats? The case offers you data to perform multiple
valuation approaches. Use them!
3. What price and exchange ratio would you recommend for the combination of Yeats
and TEI?
4.
Are there any post-combination management issues that need to be addressed?
In the second half of this session, we will take up the MRC (A) case with an eye towards
broadening the range of tools for evaluating an acquisition in strategic and economic terms.
We will pay closer attention to the tax and accounting issues raised by business combinations.
The analytical aspects of the case are relatively straightforward; however, there are some very
interesting strategic dimensions which will require your attention. As you prepare the case,
consider the following questions:
1. What are the key elements of MRC’s corporate strategy?
2. Would MRC’s strategic interests be advanced by the acquisition of ARI? If so, how?
3. Assume MRC acquires ARI for $40 million and liquidates the firm in 1968. What rate of
return would it receive on its investment? Sufficient data is available in the case text and
exhibits to calculate the “project’s” IRR. Don’t ignore the cash inflows associated with the
reductions in working capital over time as sales decline.
4. What are the downside risks of the ARI acquisition? To assess this issue, suppose MRC
acquires ARI for $40 million and liquidates the firm immediately. Estimate the cash proceeds from such a move. In arriving at your estimates, do not ignore the tax benefits
associated with the write-off or sale of assets at less than their book value.
5. What problems would you expect to encounter in managing ARI in the future?
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6. The appendix to the case provides details of MRC’s capital budgeting practices. In general,
what do you think of them? Do they seem to be well suited to handle a “project” like the
ARI acquisition?
7. If MRC acquires MRI, it would today be required to account for the transaction using the
purchase accounting method? What are the implications for this transaction? How should
accounting treatment be factored into M&A analysis? If you are unfamiliar with the accounting for mergers, Section 8 in the Balbirer handout provides the basics.
8. Should MRC go ahead with the acquisition of ARI at an asking price of $40 million?
Session 4, Nov. 14
It is time to pause and examine the structures and processes used in M&A transactions. Review the structure options which I will post for you. You need a level of familiarity with the
consequences of using different structures. I will also weave into the discussion an overview
of the role of documents in these transactions.
In the second half of this class, we’ll first take up the Cooper Industries case. It is an example
of an acquisition via tender offer when the target is not exactly enthusiastic about being taken
over. As you prepare the case, consider the following questions;
1. Is Nicholson an attractive acquisition candidate for Cooper? What role, if any, would it
play in Cooper’s overall corporate strategy?
2. What is the maximum price that Cooper can afford to pay for Nicholson and still keep the
acquisition attractive from the standpoint of Cooper? Note: There is a good discussion in
the case about the synergies Cooper can impart to Nicholson. This information, coupled
with other case data, should allow you to value Nicholson using the WACC method. Assume a WACC of 10 percent for Nicholson as part of Cooper.
3. What are the concerns and what is the bargaining position of each of Nicholson shareholders? What must Cooper offer each group in order to acquire its shares? Note: To deal with
this issue, try to think about what options each player has at this point in the discussion.
4. Assume that Cooper management wants to acquire at least 60 percent of the outstanding
Nicholson stock and make the same offer to all stockholders, what offer must Cooper management make - in terms of dollars per share and of form of payment?
Session 5, Nov.28
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The setting in Philip Morris’ acquisition of Kraft, Inc. provides another look at the takeover
market and how firms try to use restructuring as an anti-takeover device. While the case is
“data rich,” we’ll avoid the number crunching component of the case associated with the restructuring plan being proposed by Kraft, and focus on issues of strategic fit, market
dynamics and corporate governance. Prepare the case with the following questions in mind:
1. Why is Kraft a takeover target?
2. Should Philip Morris acquire Kraft? What, if any, are the potential synergies from the acquisition? Who is the major beneficiary of these synergies? Note: There’s data in the case
that can allow you to value the synergies in dollar terms.
3. What do you make of Kraft’s proposed restructuring plan?
4. How would you assess the stock price information in case Exhibit 13? What interplay of
events is contributing to the changes in share price? What’s the market trying to tell us?
5. Should Philip Morris increase its bid for Kraft? If your answer is yes, speculate on what
will happen to the price of Philip Morris’ common stock.
I also will introduce the issue of antitrust barriers to mergers and how these are evaluated in
the current environment.
To conclude our session, I will discuss the hostile takeover of Burlington Industries in 1987
and the issues that the management team and Board faced. I will also discuss the state of defensive tactics in today’s M&A environment.
Session 6, Dec. 5.
For the first part of this period, we’ll look at the John Case Company case that is an example
of a management buy-out (MBO). The senior management of the firm has the opportunity to
buy the company from its sole owner. The asking price is $20 million. The would-be purchasers can muster only $500,000; therefore, the group will be faced with the challenge of raising
the balance from external sources. Analysis of the case requires that one determine the attractiveness of the business. In particular, students need to determine whether the present owners’
asking price looks fair, and to design a financing package that will meet the needs and objectives of a wide variety of suppliers of funds. In addition, students must establish a business
plan that will enable the purchasing group to realize a satisfactory return on their investment.
Adopting the viewpoint of an advisor to Mr. Johnson and the other managers, consider the
following questions as you prepare the case:
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1. How attractive is the business they are planning to buy? What are its key operating and
competitive characteristics?
2. Based on the data in case Exhibit 5, does the $20 million asking price appear to be fair?
3. How should the management group finance the buy-out? Can the company support as
much as $19.5 million of debt? In light of the firm’s existing level of cash and marketable
securities (see case Exhibit 2), is $19.5 million in debt really necessary?
4. What is the venture capitalist likely to require as a condition for providing funds?
5. What terms and conditions should management accept on the sources of external financing? Are the conditions on the current commitments satisfactory? If not, how would you
suggest changing them?
6. If the buyout is successful, how should Case subsequently be managed? Should the proposed product line expansion, for example, be pursued?
To conclude our session, I will discuss the valuation and financing issues concurrently facing
Delphi Corporation as it attempts to emerge from bankruptcy with multiple constituencies to
satisfy in its capital structure.
Students who wish to volunteer an oral presentation of their term projects in session 7
should alert me before or by this class.
Session 7, Dec. 12
In this session, we will consider the legal/governance and ethical issues posed by M&A transactions, both friendly and hostile. It is important that future CEO’s, CFO’s and Directors
understand the legal framework in which they will be required to operate. Read the Van Gorkum and Revlon cases and the material from the Delaware Corporation Law. Be prepared to
discuss how these principles might be applied to certain of the cases we have already considered.
We will also look at the legal and ethical dimensions of insider trading when we consider the
Anheuser-Busch and Campbell Taggart Inc. case. This case concerns the decision faced by
the general counsel of Anheuser-Busch about whether he should file suit against any parties
responsible for insider trading in Campbell Taggart, an acquisition target of Anheuser-Busch.
We’ll try to keep the discussion away from technical legal points by considering the following issues:
1. Does it appear that anyone did anything illegal in this case? Unethical? Who? What?
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2. How was Anheuser-Busch damaged in this incident? How might you go about assessing
the economic damage due to insider trading? Can the stock histories in the case be used to
assess the damages in this case? (You can assume that the answer is yes. The challenge is
to use the case data to come up with a dollar amount.) How would you assess the noneconomic damage?
3. Insider trading is viewed as an extremely serious problem in the United States. Do we take
insider trading too seriously? Why don’t we just allow folks to trade on the basis of inside
information?
6. To whom is Anheuser-Busch responsible for in this incident? What should Mr. Suhre do?
Finally, read the materials presented concerning options backdating. Be prepared to discuss
whether the Board of Apple, Inc. should consider dismissing Steve Jobs. I note in an article
that Jobs has been subpoenaed by the SEC recently.
For background reading on the regulatory and legal aspects of mergers, see Section 7 in
the monogram.
Finally, we will use the last half of this class to hear student presentations of the acquisition
transaction studied in their class project. Presenters should plan a 10-minute discussion of the
strategic purposes of the deal and their assessment of its prospects for success. Students who
volunteer for these presentations will receive extra credit on the project grade.
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TERM PROJECT
Each student must analyze a rerent merger transaction selected from the attached Exhibit A
(or cleared with Professor Englar). Selections must be noted to the professor no later than the
end of the second class meeting. An analysis meeting the criteria and format must be turned in
by December 9. This analysis will count for 40% of the course grade; the amount of time and
energy you place in this project should reflect its relative weighting in the final grade.
Issues to be addressed
•
•
•
•
•
•
•
•
•
•
•
•
•
Identify the parties to the transaction, including affiliates if relevant.
State the strategic objectives of each party. Assess whether the transaction will meet
these stated objectives.
What is the structure of the transaction? Why does it appear that this particular structure was chosen? What alternatives may have been considered and why may they have
been rejected?
How has the target been valued? Comment on the appropriateness of the apparent method and alternatives?
What synergies did the parties identify? Do these appear to be realistic? In your proforma financials (see below), this should be a key line item in which you attempt to
assess available information to value and reflect the synergies.
What are the economic (after-tax) consequences to each part/constituency of the transaction?
What regulatory hurdles stand in the way of a successful completion? What are the
key issues to overcome?
List major implementation steps (at least 5) and outline a timetable. Hypothesize what
issues will be the most difficult to overcome in completing the transaction and implementing a successful integration.
What impact will the transaction have on both management teams? Speculate on what
the most difficult issues were/are?
Describe the issues in the HR/benefits area that must be addressed.
Do you perceive any ethics/governance issues in this transaction?
What are the key success factors in the transaction? Hypothesize what risks exist and
what unforeseen circumstances might occur that will cause the transaction to fail or
not meet the strategic objectives.
Create abbreviated pro-forma financial statements for the transaction. Analyze, in
depth, one line item that appears to be the most material (synergies?). An example will
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be provided in the first class meeting. These may be available in the SEC filings –
fine: abbreviate them and demonstrate your understanding of the key issues.
• Conclude your analysis with your forecast for the success of the transaction. You will
present this in the last class session.
Methodology
Because these are recent transactions, considerable information exists is SEC filings, press
releases, analysts reports and business news media. You are expected to review these materials and cite them. As long as you make reference to your source(s), e.g. company
proxy or Business Week article _______ , dated _______, you are free to adopt the ideas
and opinions of others; exact citations and quotations are not necessary. It is your assessment of the opinions and facts you access and marshal to draw your conclusions that will
drive your grade. This is the essence of good management in the M&A field (and of successful investing).
Analyses should be more than 10 but less than 26 pages, plus exhibits. Follow the sequence set forth above. You may attach as many supporting exhibits to your analysis as
you wish, but these are not required and you will not be graded on them (other than the
pro forma financials).
Five students who volunteer will present their project in powerpoint form at the last class.
An automatic half step up in their project grade will be rewarded.
Exhibit A Merger Transactions
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Financial
• Bank of America—MBNA
• Wachovia—SouthTrust
• Lincoln—Jefferson Pilot
• Citigroup—Nikko Cordial (Japan)
• Wachovia—Golden West
• Wachovia---AGEdwards
• Bank of new York—Mellon
Utilities
• Duke Energy—Cynergy
Communications
• SBC—AT&T
• Verizon—MCI
• AT&T—Bell South
Transportation
• America West—USAirways
Industrial/IT
• Chevron—Unocal
• ConocoPhillips—Burlington Resources
• Boston Scientific—Guidant
• Home Depot—Hughes Supply
• Oracle---Seibel
• Oracle—Hyperion Solutions
• Freeport-McMoran—Phelps Dodge
• Andarko—Kerr-McGee
• Microsoft—aQuantive
• Flextronics—Solectron
•
Consumer
• Disney—Pixar
• Whole Foods—Wild Oats
• Sirius—XM Satellite Radio
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•
•
•
•
•
•
•
A&P—Pathmark
Time Warner—EMI
CVS—Caremark
Brown Forman—Herradura
Ambev—Interbrew
J&J—Pfizer consumer products
Coke—Energy Brands
Global
• IBM—Lenovo
• BASF---Engelhard
• Lucent--Alcatel
• E.On AG—Endesa
• Suez—Gaz de France
• Mittal—Arcelor
• Statoil—Norsk Hydro
• Bayer –Schering
• Xstrata—Falconbridge
• Linde—BOC Group (UK)
• Thomson---Reuters
• Akso Nobel—Imperial Chemical
• RBS or Barclays and ABN Amro (BofA—LaSalle)
• Mylan—Generic drug unit of Merck KGaA
• UniCredit—Capitalia (Italy)
• US Steel—Stelco (Can)
• Danone—Numico (Fr)
• Alcan
Private Equity/Hedge Funds
• HCA
• Harrah’s
• Clear Channel
• Kinder Morgan
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Freescale Semiconductor
Univision
Lear
Delphi
Cablevision
Equity Office properties
Topps (by Michael Eisner’s Tornante)
Chrysler
Bausch & Lomb
TXU
First Data
Spinoffs
• Duke Energy—Sprectra Energy
• Altria—Kraft or international tobacco
Case Writ-up Format
Introduce key issues from the case. Do not repeat at length facts of
the case. (1 page)
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Discuss strategy issues offered by the case (1-2 pages). Assess the
positions of the companies, using SWAT or other tools as appropriate.
Analyze key issues. If valuation analysis is required, explain
which methods are used and why. Highlight key assumptions used
and why. Apply result to case. (2-5 pages).
Be sure to answer all questions posed above. However, you do not
have to follow the order in which raised. Fit them into your analysis.
Valuation calculations should be in an appendix.
Comment on process, documents, impediments (antitrust, e.g.) (1
page)
Note any ethical issues and summarize (1 page).
Total write-up (excluding appendices/exhibits) should be 7-10 pages.
Include statement of compliance with Bryan Honor Code.
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