Harvard Summer School 2008 Mergers and Acquisitions FINC S-142 (CRN 32273)

INSTRUCTOR: Professor James Grant Email: jimgrant@fas.harvard.edu MEETING TIMES: Boylston Hall, Fong Auditorium Monday, Wednesday: 6-8:30PM OFFICE HOURS: Before/after class or arranged DESCRIPTION: This course provides a foundation on the challenging and dynamic world of mergers and acquisitions. The goal of the course is to give students a solid understanding of the concepts and issues that are central to the process of mergers and acquisitions; with the intent of discovering the source(s) of value creation within mergers and acquisitions. A partial listing of topics that will be covered in the M&A course include: M&A players Types of mergers and acquisitions Role of M&A in the theory of finance Empirical gains (losses) to merging firms Strategic Acquisitions and Shareholder Value Restructuring to Create Shareholder Value M&A valuation models Underwriting M&A deals Financing Issues Legal and regulatory environment Compensation/corporate governance issues M&A accounting issues Integration and corporate culture Portfolio management implications

EDUCATIONAL APPROACH: A balanced approach is used in this course to build a rigorous foundation on mergers and acquisitions. This includes (1) a blend of academic valuation theory and empirical evidence on mergers and acquisitions, (2) a clinical-based (or event study) research activity that

allows students to employ quantitative and qualitative skills to evaluate the wealth gains (losses) to bidding and target firms, and (3) the identification and valuation of a prospective M&A deal. From a qualitative perspective, students will address the following M&A questions in their research: What type of M&A is this? What are the strategic issues facing the companies? What are the legal and regulatory ramifications? What are the corporate culture and integration issues?

From a financial (quantitative) perspective, students will apply the classic event study methodology and known equity valuation models to answer the following M&A questions: What does the empirical evidence say about the wealth impact of the particular M&A deal at hand? What are the observed announcement wealth effects on the bidding and target firms? Are the announcement wealth effects consistent with the underlying valuation of the target firm? What is the longer-term financial consequence of the M&A deal in question? Are the estimated wealth effects for merging firms consistent with that observed in empirical research?

READINGS: Harvard Business Review: Michael C. Jensen, Takeovers: Folklore and Science, Harvard Business Review (Reprint No. 84609) and Eclipse of the Public Corporation (Reprint No. 89504) Alfred Rappaport, Strategic Analysis for More Profitable Acquisitions, Harvard Business Review (Reprint No. 79409) Joseph L. Bower, Not All M&As are Alike, Harvard Business Review (Reprint No. R0103F) Robert J. Aiello and Michael D. Watkins, The Fine Art of Friendly Acquisition, Harvard Business Review (Reprint No. R00602) Nancy A. Nichols, Efficient? Chaotic? Whats the New Finance? Harvard Business Review (Reprint No. 93208) Related Articles/Works Abate, Grant, and Stewart, The EVA Style of Investing, Journal of Portfolio Management, Summer 2004 Grant, James L., and Emery A. Trahan, Active Investing in Strategic Acquirers using an EVA Style Analysis Financial Services Research Forum, University of MassachusettsBoston, 2007

Jensen, Michael C., Agency Costs of Free Cash Flow: Corporate Finance and Takeovers (SSRN download) McNamara, Gerry, Jerayn Haleblian, and Bernadine Dykes, The Performance Implications of Participating in an Acquisition Wave Academy of Management Journal, 2008 Miller, Merton H., Leverage. 1990 Nobel Prize lecture. Textbook (Foundations): Value-Based Metrics: Foundations and Practice, Fabozzi, Frank J. and James L. Grant (John Wiley & Sons, 2000) (Noted below as FG) Foundations of Economic Value Added (paperback 1st edition-see instructor) (Noted as G) GRADING POLICY: The overall grade for Mergers and Acquisitions consists of four parts: Event study research project at 30% Valuation of a prospective M&A deal at 30% Course examination at 30% Class participation at 10%.

Note: Im a firm believer in portfolios and the benefit of diversification! COURSE PROJECTS: The course projects include two research activities: (1) a clinical-based (or event-study) project that allows you to employ quantitative skills to evaluate the wealth gains (losses) to bidding and target firms, and (2) the identification and valuation of a prospective M&A deal. The details of these activities will be described under separate cover. The following proprietary financial software will be used in the course projects: -JLG Event Study Analysis Template* (Market Model, Residuals, and CAR) -JLG Equity Analysis Template* (Integration of Traditional and Value-based Metrics) *Available for on-line purchase at: www.jlgresearch.com/jlg_templates.htm COURSE TOPICS: 1) Welcome/Introduction to M&A Design of M&A research projects: Event study/Prospective M&A Valuation

2) Empirical Gains (Losses) to Merging Firms Readings: Jensen: Takeovers: Folklore and Science G1, 3 3) M&A in the Theory of Finance Financial characteristics of wealth creator & wealth destroyers Readings: FG 2 (pp. 7-21 top; 42 middle-49) FG 3, FG4 (advanced/skim) Jensen: Eclipse of the Public Corporation 4) Types of Strategic Growth: Organic Growth, Positive Restructure, M&A Readings: Miller, Leverage - debt dont matter Abate and Grant: The EVA Style of Investing G4, 5 5) Types of Mergers and Acquisitions: Friendly, unfriendly; vertical, horizontal, conglomerate, etc. Readings: Bower: Not all M&As are Alike 6) M&A Valuation Models I Price Relative Models Discounted Cash Flow/DDM Model Reading: FG 2 (pp. 27 bottom-35 top) 7) M&A Valuation Models II Free Cash Flow Model Economic Profit (EVA) Model Readings: FG 2 (pp. 35-42 top) Rappaport: Strategic Analysis for More Profitable Acquisitions (pp. 99-top 107 (through Exhibit X) exhibit 8 (valor se ele mudar o WACC) 8) Practical Aspects of M&A Valuation Readings: Nancy A. Nichols, Efficient? Chaotic? Whats the New Finance? 9) Research Presentations I: Event Studies PowerPoint Presentations Executive Summaries 10) Legal and Regulatory Environment

Readings: TBA 11) M&A Financing Issues I Target Capital Structure/Agency Costs Readings: Grant, EVA in the Theory of Finance II: Financing Decisions (Handout) Rappaport: Strategic Analysis for More Profitable Acquisitions (pp. 107-end) Jensen, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers 12) M&A Underwriting Process Incentive Compensation/Corporate Governance Readings: FG 5 (pp. 107 bottom-110) (incentive compensation) 13) M&A Accounting Issues US GAAP versus IFRS Purchase versus Pooling Economic Profit versus Accounting Approach Readings: Feldman, Goodwill xxx) FG 5 (pp. 111-121 middle) 14) M&A Integration/Corporate Culture Readings: Robert J. Aiello and Michael D. Watkins, The Fine Art of Friendly Acquisition 15) Portfolio Management Implications Grant and Trahan: Active Investing in Strategic Acquirers Readings: McNamara, Haleblian, and Dykes, The Performance Implications of Participating in an Acquisition Wave Bandopadhyaya and Grant Hedge Fund Demoraphics and Prformance (last exhibit) 16) Research Presentations: Prospective M&A Executive Summaries PowerPoint Presentations Course Review EXAMINATION ________________________________ JLG: 5/22/08