The University of British Columbia

Sauder School of Business

Financial Management, COMM471
Fall 2012

Instructor: Kai Li, finance.sauder.ubc.ca/~kaili, kai.li@sauder.ubc.ca

HA 864, 604.822.8353, office hours T Th 3-4pm, or by appointment

Course webpage: Vista

Power point slides and other materials will be posted on the course website.

Course Objectives
Financial Management is the art and science of basing important corporate decisions and their
implementation on current financial theory, advanced quantitative and empirical methods, and
best practices deduced from careful study of relevant business cases. In this course we will use
mergers, acquisitions, and corporate restructurings as a focal point in our study of financial
management. These critical events in the life of a corporation require sound judgment based on
the full set of tools available to the financial manager. We will draw on, apply to M&A settings,
and extend your knowledge of finance topics including valuation, financial statement analysis,
working capital management, capital structure, financial distress, securities markets, securities
issuance, agency theory, corporate governance, executive compensation, and both real and
financial options. Our study of change of control will include the economic motivations for M&A
activity, advanced valuation, transaction structuring, creative financing, risk management, tactics
for friendly M&A negotiations and hostile transactions, due diligence, and execution. We
consider the central role of corporate managers, private investors, investment funds, public
financial markets, and regulators.

By the end of the course you should:

 Be able to identify plausible motivations for M&A activity

 Understand the reasons for differences in the method of payment and financing for
different transactions, and be able to recommend reasonable payment and financing
packages for a proposed deal
 Further develop your knowledge of valuation techniques that can be applied in M&A
settings and know when and where to apply these methods
 Understand incentives of different parties and how these will influence their actions
 Know the factors that are associated with long-run success or failure in change of
control transactions from a shareholder point of view, and be able to use this
knowledge to predict what transactions might be beneficial to investors
 Understand tactics for friendly negotiations and hostile transactions
 Understand the legal and regulatory hurdles involved in change of control transactions
 Be able to assess how securities market conditions affect M&A activity
 Have completed a pitch proposal for a transaction, and be able to fully explain the deal
including motivation, valuation, transaction structuring, and integration

Teaching/Learning Method
The course is balanced between lecture, cases, and student presentations. Students will need to
prepare for class beforehand, using both cases and readings. We will develop our basic
understanding of course topics together through class activities. Students will have an
opportunity to extend their knowledge in specific areas through assignments, and will hopefully

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bring this knowledge back to the rest of the class. Active participation in class is essential to the
learning environment and all questions or discussion points that are thoughtful and respectful to
your classmates will be valued.

Readings/References
A good corporate finance textbook such as Brealey, Myers, and Allen or Ross, Westerfield, Jaffe,
and Roberts will be helpful.

Three useful background books on M&A are:

R. F. Bruner, Applied Mergers and Acquisitions
P. A. Gaughan, Mergers, Acquisitions, & Corporate Restructurings
S. F. Reed, The Art of M&A: A Merger Acquisition Buyout Guide

Multiple copies of these books are available at the Lam Library, and can be purchased easily over
the internet.

A longer reading list of both books and articles is on the course website, and should be used to
deepen your knowledge in specific areas of interest to you in the process of satisfying course
requirements.

Requirements/Evaluation
Approximate Grade Composition
30% Case presentations and memoranda
40% Final project, M&A Pitchbook
30% Class participation and Case Journal

Cases
Cases can be purchased from HBS online at:

There are five cases in the course. Students will work in groups of five or fewer.

I will lead the first case discussion (Ducati), and student groups will be assigned to write a
memorandum and lead the discussion for one case each of the remainder four. There should be
nine groups per section and hence two groups working on each case, except for Hertz which will
have three groups.

The student groups will turn in their memoranda electronically to their instructor (see email
address on syllabus heading) forty-eight hours before class, and the memoranda will be made
available to all students in the class via Vista. The instructor and other students will use this time
to study the memoranda before the presentation.

Each group memorandum should be approximately five pages of text with 1.5 spacing and 12 pt
font and 1 in margins (roughly), plus any appendices that are necessary. Note that although limits
are not imposed on tables and appendices, unnecessary or weak attachments are not helpful.
Focus on impact and interest, not quantity. Check to make sure that all your attachments are
really necessary and add value; eliminate those that do not clearly make the cut. Writing matters
as well. The whole class will appreciate if you eliminate from the memoranda simple repetition
of case facts, and instead focus on analysis.

For the case discussions, the two (or three) groups will generally lead discussions with prepared
presentations on the first day (with reasonable opening for questions), while the second day will

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permit more detailed questioning and follow-up. The two groups leading discussion of each case
can decide on one of three models for their presentations:

1. Leader / Follower: One group leads off the presentation (about 20 minutes) while the
second group focuses on follow up and response. The first group can focus on presenting
their analysis, while the second group can analyze which points are shared in common
and which there is disagreement on, which should present opportunities for class
discussion. Please note that this setup is not intended to be adversarial, and the focus
should be primarily on illuminating the relevant issues, rather than devolving into an
argument over who is right. This requires tact in putting forward one’s own view while
allowing thoughtful consideration of other perspectives.

2. Symmetric / joint presentation: The two groups essentially choose to merge their
presentations, while still making an effort to point out where they share common ground
and where the analysis in their memorandum differed.

3. Role play: The two groups decide to take on different roles (e.g., target vs. acquirer) in
order to more effectively present the case to the class.

Please note that the two groups’ mutually agreed choice of presentation format should have no
impact on the memorandum format, as the two groups should be symmetric and work
independently in writing their memoranda. Evaluation for the presenting groups will consist of
their memorandum, presentation, and peer evaluation.

Students not presenting in a given week are still expected to prepare for class, to participate
actively, and to comment on the case in their Case Journal, as discussed below. Out of respect for
their fellow students, class members should not come to class late or leave early unless this is
discussed with the instructor beforehand.

Class Participation and Case Journal

Students are expected to prepare for class and participate actively. Each class member will keep
a case journal. This will include a one to two page discussion of the main learning points of each
case, to be completed after the case discussion. The highest standard here would be to not simply
repeat points from the class discussion, but to use the case as an opportunity for further
investigation. Consider (1) any open issues remaining at the end of the case that you would like
to analyze further, (2) any current events that you can relate to issues discussed during the case,
(3) any lectures or supplemental reading materials that you can relate to the case. The journal is
an opportunity for you to go beyond what is covered in class and explore in more detail areas of
special interest to you. It will be helpful if you keep up to date on your journal, rather than
attempt to catch up on everything at the end of the semester before the journal is submitted.

M&A Pitchbook
The final project for the course will be to develop a pitch book for a proposed M&A transaction.
Students will work in groups of five or fewer (most likely your case groups), and take the point of
view of an M&A advisor for either a potential acquirer or potential seller. This project will be
due during the exam period. In lieu of an exam, we will have an extra meeting during this time
period during which students will make their presentations. Depending upon class size, these
should be about 15 minutes in length. Evaluation will be based upon both the oral and written
components of the pitch book presentation, as well as peer evaluation. Additional instructions
will be posted on the course web site.

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 Course Outline
(Please check Vista for any update)

Weeks 1-3:
Introduction and M&A Valuation: DCF, multiples
Case Discussion: Ducati & Texas Pacific Group

It will be helpful if you think about these questions before our Ducati discussion:

1. On a scale from 0 to 10, with 0 representing the prototypical financial buyer transaction,
and 10 representing the prototypical strategic buyer transaction, where would you place
this deal? Why?
2. To value the 51% of Ducati that TPG is contemplating acquiring, outline the steps you
would take. It is optional to actually complete the valuation. More importantly, describe
– each step you would need to take in the valuation process
– what data you would need to complete that step
– What data in the case is available that is needed (referring to Exhibit numbers /
pages)
3. How much should TPG be willing to bid? How does this relate to your answers in
questions 1 and 2?

Weeks 4-6:
M&A Valuation: Theoretical frameworks, historical and international perspective,
current trends, participants, deal taxonomies, wealth effects
Case discussion: HP-Compaq Merger

It will be helpful if you think about these questions before our HP-Compaq discussion:

Case Part A:
1. What would a Strength Weakness Opportunities Threats (SWOT) analysis reveal?
2. Was the merger strategy sound?
3. What is the value of the projected synergies?
4. What is the appropriate valuation range for Compaq?

Case Part B:
1. Complete a social-issues scorecard on this deal. Is this a true merger of equals? Does one
side seem to emerge with more power than the other?
2. Given the acquisition premium, how dependent is HP on the expected synergies for this
deal to be economically attractive to HP shareholders?
3. Assess the appropriateness of the exchange ratio proposed in this deal. In terms of
relative contributions of the two firms, is the exchange ratio fair to HP shareholders?
4. Consider the entire set of terms: Is this a good deal? For whom?
5. How should Kathryn Macalester vote her shares?

Weeks 7-9:
Transaction Structuring: Legal structure of mergers, choice of consideration, deal
protection, accounting, taxes, antitrust, due diligence
Case Discussion: Bidding on the Yell Group

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 It will be helpful if you think about these questions before our Yell discussion:

1. Is Yell a good buyout candidate?

2. How similar are the U.K. and U.S. businesses? Do the management projections in
Exhibit 6 and Exhibit 7 make sense to you? In other words, if you were part of the
Apax/Hicks Muse team, would you trust them?
3. How does Yell’s projected debt affect its valuation?
4. How does the cross-border nature of the Yell deal affect the valuation of the firm?
5. How much is Yell worth? How much would you bid?
6. If you were Apax/Hicks Muse would you do the deal?

Weeks 10-11:
Hostile Transactions: Takeover strategies, defensive tactics, state takeover laws, duties of
directors
Case Discussion: Roche’s Acquisition of Genentech

It will be helpful if you think about these questions before our Roche-Genentech discussion:

1. Why is Roche seeking to acquire the 44% of Genentech it does not own? From Roche’s
point of view, what are the advantages of owning 100% of Genentech? What are the
risks?
2. As a majority shareholder of Genentech, what responsibilities does Roche have to the
minority shareholders?
3. As of June 2008, what is the value of the synergies Roche anticipates from a merger with
Genentech? Assess the value of synergies per share of Genentech. Please use 9%
weighted average cost of capital in your analysis.
4. Based on DCF valuation techniques, what range of values is reasonable for Genentech as
a stand-alone company in June 2008? Please exclude synergies from your valuation and
use a 9% weighted average cost of capital. You can assume that as of the end of June
2008, Genentech held approximately $7 billion in cash, which included investments and
securities that were not needed in its daily operations (Note: Exhibit 10 is a good starting
point for this analysis).
5. What does the analysis of comparable companies (Exhibits 12, 13, and 14) indicate
about Genentech’s value within the range established in question 4?
6. How has the financial crisis affected Genentech’s value? What changes in valuation
assumptions occurred between June 2008 and January 2009?
7. How did Genentech’s board and management respond to Roche’s offer of $89 per share?
8. What should Franz Humer do? Specifically, should he launch a tender offer for
Genentech’s shares? What are the risks of this move? What price should he offer? Should
he be prepared to go higher? How much new financing will Roche need to complete the
tender offer?

Weeks 12-13:
LBOs and Final Project Preparation: Traditional model, current trends
Case Study: Bidding for Hertz

It will be helpful if you think about these questions before our Hertz discussion:

1. How does the dual-track process used by Ford to initiate “consideration of strategic
alternatives” affect the bidding process for Hertz?

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 2. In what ways does Hertz conform or not conform to the definition of an “ideal LBO
target”? Do you believe Hertz is an appropriate buyout target?
3. Strategically, what value-creating opportunities can the sponsors exploit in this
transaction?
4. How realistic are the key assumptions that underlie the Bidding Group’s projections in
case Exhibits 8, 9, and 10? Which assumptions are most likely to have the largest impact
on returns?
5. What is the value of Hertz using the Equity Cash Flow method of valuation?
6. Based on the base-case estimates in case Exhibits 8, 9, and 10 and your estimate(s) of
terminal value if the sponsors put up $2.3 billion in equity, what return can they expect to
earn?
7. If Carlyle desires a 20% target return on its equity investment, does your analysis suggest
that $2.3 billion is too much to pay, or can it afford to pay more—in either case, by how
much?
8. What is the market-required rate of return for this investment, and why might this differ
from the sponsors’ target return?

Guest speakers: TBA

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Course Readings:
 Non-HBS materials are posted on course vista, HBS notes can be purchased on line.

“Private Equity, Corporate Governance, and the Reinvention,” by Wruck, Journal of Applied
Corporate Finance 20, 2008, 8-21.rket for Corporate Control

“The Era of Cross-Border M&A: How Current Market Dynamics are Changing the M&A
Landscape,” by Zenner, Matthews, Marks, and Mago, Journal of Applied Corporate Finance
20, 2008, 84-98.

“Private Equity: Past, Present, and Future An Interview with Steve Kaplan,” Journal of Applied
Corporate Finance 19, 2007, 8-16.

“Big is Better: Growth and Market Structure in Global Buyouts,” by Cornelius, Langelaar, and
van Rossum, Journal of Applied Corporate Finance 19, 2007, 109-116.

“University of Rochester Roundtable on Corporate M&A and Shareholder Value,” Journal of

Applied Corporate Finance 17, 2005, 64-84.

“Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions,” by
Rappaport and Sirower, HBS course website online purchase.

“Technical Note on Equity-Linked Consideration, Part 1: All-Stock Deals,” by Baldwin, HBS

course website online purchase.

“Technical Note on Equity-Linked Consideration, Part 2: Announcement Effects,” by Baldwin,

HBS course website online purchase.

“Technical Note on Equity-Linked Consideration, Part 3: Cash-and-Stock Deals,” by Baldwin,

HBS course website online purchase.

“Technical Note on Consideration: Floors, Caps, and Collars,” by Baldwin, HBS course website
online purchase.

“Fine Art of Friendly Acquisition,” by Aiello and Watkins, HBS course website online purchase.

“The HBR Interview: Bruce Wasserstein on Giving Great Advice,” by Wasserstein, Stewart, and
Morse, HBS course website online purchase.

“M&A Legal Context: Standards Related to the Sale or Purchase of a Company,” by Baldwin,
Bagley, and Quinn, HBS course website online purchase.

“M&A Legal Context: Hostile Takeovers,” by Baldwin, Bagley, and Quinn, HBS course website
online purchase.

“M&A Legal Context: Basic Framework for Corporate Governance,” by Baldwin, Bagley, and
Quinn, HBS course website online purchase.

“Stock-Market Driven Acquisitions,” by Shleifer and Vishny, Journal of Financial Economics

70, 2003, 295-311.

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“The Agency Costs of Overvalued Equity and the Current State of Corporate Finance,” by
Jensen, European Financial Management 10, 2004, 549-565.

“Do Stock Mergers Create Value for Acquirers?” by Savor and Lu, Journal of Finance 64, 2009,
1061-1097.
“Managing M&A Risk with Collars, Earn-outs, and CVRs,” by Caselli, Gatti, and Visconti,
Journal of Applied Corporate Finance 18, 2006, 91-104.

“Tuck Note on Leveraged Buyouts.”

“The Anatomy of an LBO: Leverage, Control and Value,” by Damodaran.

 Recommended viewing:
“Insider Job”
“Margin Call”
“Too Big to Fail”
“Wall Street” and its sequel “Money Never Sleeps”