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Mergers & Acquisitions

Prof. Ian Giddy

A mini-course dedicated to the valuation, structuring, financing and negotiating of

M&A transactions

 Evaluating and pricing acquisitions

 Identifying and implementing operational and control synergies
 Creating shareholder value through rigorous pre-merger analysis
 Negotiating the terms of the deal
 Post-merger restructuring and divestitures
 Financing the acquisition

The Course
This course uses an analytical framework and real-world applications to introduce the key
principles and techniques of successful mergers, acquisitions,  divestitures and leveraged
buyouts. It addresses crucial questions including: Why do mergers that looked great on paper
fail in reality? How does one value companies acquiring, or being acquired? What is the best
negotiation strategy? What does it take to make the "synergy" come to life? How can a
merger be funded in such a way as to retain the merged entity's flexibility? When do
leveraged buy-outs make sense, and how can they be financed? 

One goal for students is to develop a critical appreciation of the key finance criteria in a
proposed acquisition, so as to grasp the main strengths and risks of the company's strategic
and financial alternatives. 

Course Requirements
There is no course textbook, although several recommended books are listed at the bottom of
this page. Students will be provided with an online package of materials useful for analysis
and structuring of merger and LBO transactiions, including case studies, pertinent articles,
rating agency reports and sample documentation from actual deals done in North America,
Europe and elsewhere. Each student will be given the opportunity to demonstrate their
understanding of deals through individual and group work and plenary discussions. Grading
will be based on your class contribution, written assignments and an online final exam.

Pre-course assignment: Read the case study Houston Exploration, and be prepared to
discuss it in class.

Issues for Discussion

 How should a target company be valued? How does the method of valuation affect
the availability of funds from banks, institutional investors and private equity
investors?
 How can one assess the potential gains from an acquisition? How dependable are
these projections, from an investor's viewpoint?
 What are the key features of due diligence?
 How much money is needed for the transaction, including fees and restructuring
costs?
 When should a company divest? What are the alternative ways of divesting a
business?
 What are the key terms and conditions, covenants and pricing, of different sources of
acquisition finance, including subordinated notes, mezzanine finance and high yield
bonds?
 What are the essential features of leveraged buyouts? How can one structure the
financing of an LBO to raise the funds needed without losing control?
 Course Outline
 
Session Topics Materials

One  Corporate Finance, Strategy and the Presentations

Economics of M&A Mergers & Acquisitions: The
Economics
Acquisitions: Strategy and Due
 The decisions that create shareholder
Diligence
value
 Investment, financing, payback and risk Case Studies
management Houston Exploration
 Managers’ vs shareholders’ vs lenders' The SBC-AT&T Merger
interests: the agency problem The Acquisition of Allied
 Why M&A drives the market for corporate Colloids: Episode 1
control The Acquisition of Allied
Colloids: Episode 2
 Mergers and acquisitions: when do they
New York Magazine
make sense?
 Mini-case studies: Wärtsilä NSD, Articles
Sterling Drug, AOL-Time Warner Getting Better at M&A?
 The distinguishing features of successful Glossary of M&A Terms
and unsuccessful deals Technology Mergers
 Research evidence on which mergers Types of Mergers and
add value, and which destroy value Acquisitions
Sample Due Diligence Checklist
 The four sources of acquisition value
 Case study: The SBC-AT&T Merger.
We seek to isolate the potential synergies Spreadsheets
in a merger of two mature telecoms sbc-att.xls
companies. valuedrivers.xls

Evaluating Acquisitions, and Undertaking Due

Diligence

 What are the target's value-drivers?

 Required performance improvements
embedded in acquisition premiums
 Competitive conditions that must drive
valuations
  What due diligence can reveal – and what
it cannot
 The winner’s curse and morning-after
woes
 Case study: The Acquisition of Allied
Colloids. We trace the sequence of
events in this cross-border merger and
develop a due diligence checklist.
 Tailoring due diligence to the company
and industry
 Case study: New York Magazine. What
are the key aspects of due diligence in
the publishing world?.

Two Valuation for Mergers and Acquisitions Presentations

M&A: Tools of Valuation
M&A: Valuation Applications
 Asset-based and balance-sheet
approaches
Case Studies
 Market valuea approaches Actavis Valuation
 Multiples and comparables Active Generation
 Enterprise value and EBITDA Jamba Juice
MTC-Celtel
 Establishing required rates of return
 Free cash flows to equity Articles
 Free cash flows to firm Calculating a Company’s Cost
 Dividend- and cashflow-discount models of Capital
Methods of Valuing a Business
 Case study: Active Generation. Teams
value a private company for acquisition,
Spreadsheets
using both comparables and cash flow
actavis_ev.xls
methods and incorporating the results of
actavis_fcf.xls
potential synergies
actavis_valuation.xls
 Real option approach schirnding.xls
 Distress situations mergersynergy.xls
 Blank-check acquisition companies bofafleetupdate.xls
active_generation_valuation.xls
 Application: Jamba Juice. Where's the mtc-celtel.xls
value added?
 Break-up valuation
 Synergy analysis
 Sensitivity analysis
 Case study: MTC-Celtel. How can one
value the synergies resulting from a
potential acquisition, adjusting for risk and
cost-of-capital effects and employing
sensitivity analysis on the hoped-for
synergy gains?
Three Negotiating the Terms of a Merger Presentations
Negotiating a Merger
 Role of investment bankers and other
Case Studies
advisors
Goldfield: Anti-Takeover
 Developing a negotiating stance Defenses
 Understanding sellers' goals and Johnson & Johnson vs Guidant
constraints Ashanti-Bogoso: Negotiating a
 Dealing with defensive strategies: poison Merger
pills and other devices
Articles and Documents
 Mini case study: Goldfield's Anti- Sample Letter of Intent
takeover Defenses Sample Confidentiality
 Dealing with rival bidders Agreement
 Dealing with private owners Sample Purchase Agreement
 Structuring the deal: How much should Analysis of a Merger Failure
we pay? How should we pay?
Spreadsheets
 The proposed basic Term Sheet ashanti-bogoso.xls
 Keep the romance alive during due
diligence and while you secure financing
 Closing the deal
 Case study: Ashanti-Bogoso. Teams
engage in a hands-on negotiating
exercise including valuation, setting the
price and payment terms of the merger,
and negotiating control

Four Divestitures Presentations

Divestitures
 Post-acquisition divestitures
Case Studies
 Measuring and managing break-up value Caterpillar
 Application: John Deere - Breakup Pinault-Printemps-Redoute:
Value Divestiture of Finaref
 Taxable and tax-free corporate breakups
Spreadsheets
 Before-and-after divestiture analysis
johndeere.xls
 Case study: Pinault-Printemps- breakup.xls
Redoute. We learn how to perform a
before-and-after divestiture valuation

Five Acquisition Finance Presentations

Acquisition Financing
 Finding the optimal capital structure: debt,
Case Studies
equity or mezzanine?
Financing Acquisitions at
 Capital structure  considerations Photronics
 Case study: Photronics. Financing Jefferson Smurfit
acquisitions at a technology company Woodstream Mezz
Woodstream Termsheet
  Senior secured bank financing Le Meridien: A Leveraged
Acquisition
 Asset-based finance
 Bridge financing Articles
 Second-lien and PIK notes Second Lien Loans
 Application: Jefferson Smurfit Mezzanine Finance 1
acquisition finance Mezzanine Finance 2
 Subordinated seller notes
Spreadsheets
 Mezzanine debt woodstream.xls
 Refinancing strategies
 High-yield bonds
 Private equity sources
 Case study: Le Meridien. Students
evaluate a variety of creative financing
techniques in the context of this
challenging acquisition situation.

Six Leveraged Buy-Outs Presentations

Leveraged Buy-Outs
 The different approaches of financial vs
Case Studies
strategic buyers
Nukem Security
 The leverage effect The LBO of ISS
 How to structure and price the leverage iss_financials.xls
for an acquisition or buyout Reykjavik Fleet Leasing
 Exercise: spreadsheet-based debt Flexics: Selling the Company 
capacity analysis for leveraged finance
 Focus: synthetic ratings and debt pricing Articles
Introduction to Leveraged
 Focus: mezzanine and private equity Finance
finance A Note on LBOs
 Case Study: The LBO of ISS Debt-to-EBITDA
 Management vs outside equity LBO Legal Checklist
 Valuation in LBOs: “The VC Method”
Spreadsheets
 Paydown and exit analysis ratings.xls
 Case study: Exit for Reykjavik Fleet lbocapacity2.xls
Leasing financing_iss

 Integrating Case Study: Flexics. Rivals

teams employ the tools and ideas of the
course to a competitive situation featuring
a leveraged buyout and sale to a strategic
buyer. They negotiate key features,
including:
- Valuation of the target
- Raising the funding
- Terms of payment
- Summary "term sheet" agreement
Additional Resources
Books
Robert Bruner, Applied Mergers and Acquisitions
Enrique Arzac, Valuation for Acquisitions, Buyouts and Restructurings
Donald de Pamphilis, Mergers, Acquisitions and Other Restructuring (Academic Press)
Aswath Damodaran, Damodaran on Valuation
McKinsey Quarterly (on-line subscription)

Background Articles
Methods of Corporate Valuation
Notes on cost of capital and capital structure .
Critique of Valuation Methods
Private Equity Valuation Guidelines
A Company in One Page
The Fool's Method
Warren's World
Corporate Financial Restructuring
Real options valuation

Useful Links
dealbook (M&A and private equity deals)
biz.yahoo.com (summary data and financials)
morningstar.com (summary financials)
investinginbonds.com (treasury rates, corporate bond prices and ratings)
standardandpoors.com (bond ratings)
bondsonline.com (corporate bond spreads)
damodaran.com (industry ratios)
advfn.com (corporate financial ratios)

About the Instructor

Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in 40+ countries
worldwide for the past two decades. He was Director of International Fixed Income Research
at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on
international finance, he has served at the International Monetary Fund and the U.S. Treasury
and has been a consultant with numerous corporations and financial institutions in the U.S.
and abroad. As a banker and consultant he has been involved in the growth of the structured
finance market in the USA, Europe and Asia. He is the author or co-author of The
International Money Market, The Handbook of International Finance, Cases in International
Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River
Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa
Rica.