M&A Course, Warsaw School of Economics, Spring 2010

Instructor:

Name: Mariusz-Jan Radło, Ph.D.

Office: Building A, room 317.

E-mail: [e-mail]

Course website: http://radlo.org/m&a.html

Course Overview:

Learning Objectives: To provide students with knowledge of:

1. what corporate restructuring is and why it occurs;

2. commonly used business valuation techniques and how financial modeling methods can be applied to valuing various types of business combinations;

3. how value is created (or destroyed) as a result of corporate mergers, acquisitions, divestitures, spin-offs, etc., through an analysis of how to do a deal;

4. commonly used takeover tactics and defenses;

5. the importance of understanding assumptions underlying business valuations;

6. a highly practical “planning based” approach to managing the acquisition process;

7. challenges and issues associated with each phase of the M&A process from developing acquisition plans through post-closing integration; and

8. the advantages and disadvantages of alternative deal structures.

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.

The latter is accomplished by having students develop business plans involving an acquisition to implement the firm’s business strategy. 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, human resource 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. Students will learn how to structure and finance such transactions.

Students will be asked to form acquisition teams to develop a highly realistic acquisition plan 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.

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, corporate treasurers, strategic planning managers, bank lending officers, auditors, venture capitalists, business appraisers, actuaries, human resource managers, risk managers, etc.

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.

Required Text: Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, 5th edition, by Donald M. DePamphilis, Academic Press, 2010. The course will focus on 9 of the 14 chapters in the book. These include Chapters 1, 3-9, 10, and 13.

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

Grading: Students will be evaluated in three different ways:

Grade Points:

Examination 40%

Acquisition Plan (see discussion below)¹ 30%

Assignments and class participation: 20%

Assignments will not be accepted after their due date, which is defined as the end of the class on the day they are due. 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).

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. 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. 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 Plan Outline: Early in the term students will divide themselves into “teams” of four-to-five students each to share the research, analysis, and field work required to design a viable business acquisition proposal.

The proposal must conform to the following conditions:

(1) each team will be representing an acquiring company or investment group whose business growth strategy involves an acquisition or merger and

(2) 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) or a current transaction as long as the acquiring and target firms are in the same industry and the principal motivation for the acquisition is growth. Alternatively, the acquisition can be a purely hypothetical transaction involving two publicly traded firms. The use of publicly traded companies will facilitate data collection, and the selection of companies in the same industry will simplify the analysis. 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.

Students are encouraged to focus on non-financial companies as acquirers and target firms. We will not be covering how to value banks and other types of financial services firms. You are also encouraged to avoid companies that do a great deal of “off balance sheet financing” such as airlines. Each team must obtain approval from the Professor of the acquiring and target companies they would like to study.

The purpose of the Acquisition Project is to give students the opportunity to apply the tools they have learned in an increasingly common real world situation, i.e., mergers and acquisitions. Acquisition plans will be presented during last two classes. Each team must address the following areas:

1. Industry/market overview: Describe the industry/market in terms of size, growth rate, product offering, and other pertinent characteristics. Furthermore, describe industry/market dynamics in terms of customers, competitors, potential entrants, product/service substitutes, and suppliers.

2. Opportunities/threats: Discuss major opportunities and threats that exist because of the industry’s competitive dynamics. Be sure that you can show how these threats or opportunities are a consequence of industry dynamics described in (2).

3. Objectives: Specify how the acquisition or merger will enable the new company (i.e., the combination of the acquirer and target firms) to grow and create shareholder value. Cite specific objectives the acquirer hopes to achieve (e.g., gain access to new customers or products or proprietary technologies, improve shareholder value by achieving economies of scale or scope, etc.) and quantify whenever possible. Note that objectives can include the exploitation of opportunities or defense against threats identified in section (3).

4. Search plan: Identify

--Screening criteria employed to identify potential target firms

--Specific tactics (e.g., desire for a “friendly” transaction or controlling interest, willingness

to use stock, willingness to use “earn-outs,” etc.)

--Plans for conducting search and making first contact

1. Negotiating strategy: Once the primary target has been identified

--Describe what you believe to be the primary issues/needs of the parties involved (i.e., both

acquirer and target firm stakeholders)

--Recommend a deal structure that addresses the primary needs of all parties. Identify and

explain the rationale for choosing the main elements of the structure including the proposed

acquisition vehicle, post closing organization, form of payment, form of acquisition, and

tax structure. Indicate how you might “close the gap” between the seller’s expected price

and the offer price, if the seller rejects the initial offer, by making a counter-offer.

1. Financials and valuation:

--For the acquiring and target firms, provide projected five year income, balance sheet, and

cash flow statements and estimate each firm’s value based on its projected cash flows as if

it were to remain independent. If projected net cash flows during the five years are negative,

extend the annual projections until they turn positive. List key forecast assumptions.

--Provide projected five year income, balance sheet, and cash flow statements for the

consolidated acquirer and target firms including the effects of potential synergy. Clearly

state potential sources and destroyers of value.

--Develop a preliminary minimum and maximum purchase price range for the target firm.

--Identify an initial offer price, the composition (i.e., cash, stock, debt, or some combination)

of the offer price, and why you believe this price is appropriate in terms of meeting the

primary needs of both target and acquirer shareholders. The appropriateness of the offer

price should reflect your preliminary thinking about the deal structure.

1. Financing plan: Using the combined/consolidated financial statements, determine if the proposed offer price can be financed through some combination of cash, stock, or borrowing without endangering the combined firm’s credit worthiness or seriously eroding near-term profitability and cash flow.

2. Integration plan: Identify potential integration challenges and possible solutions. (For those teams characterizing themselves as financial buyers, integration may not apply. Instead, they should identify an appropriate “exit” strategy.)