Course Title: FBE 460: MERGERS, ACQUISITIONS AND RESTRUCTURING Syllabus for Spring 2014 Professor: Lloyd Levitin

Office: Acc. 301E Office Phone: 310-740-6524 E-mail: levitin@marshall.usc.edu TA: Michael Haddad (mjhaddad@usc.edu)

Lecture Class Monday and Wednesday 4:00 5:50 P.M. Teaching Assistant: Office Hours Mondays Tuesdays Wednesdays Thursdays

Room: ACC 303

Eugene Lee (leeeugen@usc.edu) 2:45 3:45 P.M. 2:45 3:15 P.M. 2:45 3:45 P.M. 5:15 5:45 P.M.

Course Objective The primary objective of the course is to provide a practical understanding of the major strategic, economic, financial, human resources, and governance issues of mergers, acquisitions, and restructuring. The course is suitable for any Marshall undergraduate who desires a basic knowledge of M&A transactions in order to do effective work in a wide range of fields, including corporate development, corporate finance, investment banking, and consulting. The course is most suitable for students considering careers in finance. Learning Objectives This course will help you to: understand the role that M&A plays in the contemporary global market, and its use as a strategic tool to provide growth, enhance competitive position, transform a company or industry, and create shareholder value. develop a framework that can be used for analyzing M&A transactions including understanding strategic rationale, valuation methodologies, deal structures, bidding strategies, and the need for a value proposition. know how M&A can be used successfully as well as its pitfalls, dangers and risks. foster an understanding of the M&A process from target selection to doing the deal (including due diligence, integration planning, negotiating the agreement, announcing the deal), to closing and integration. recognize the advantages and disadvantages of alternative deal structures. have an understanding of commonly used takeover tactics and defenses. choose a path for restructuring that will meet corporate goals and create shareholder value. understand the practical limitations of the various valuation approaches. minimize the risk that a merger or acquisition will not meet expectations.
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Learning Objectives, continued know when alliances or joint ventures are preferable alternatives to mergers and acquisitions. understand how value is created (or destroyed) as result of corporate mergers, acquisitions, and restructuring transactions. Understand the role played by corporate boards and third parties (consultants, investment bankers, analysts, and institutional investors) in M&A deals 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, strategic planning managers, auditors, venture capitalists, business appraisers, consultants, or who simply have an interest in the subject. Prerequisite BUAD 215 or BUAD 306 Required Materials Mergers, Acquisitions and Other Restructuring Activities by Donald M. DePamphilis, (Academic Press, 7th edition, 2014). Course packet containing 9 cases available at the bookstore. Course Notes: Copies of lecture slides and other class information are available through your Blackboard account. Students Companion Site This site can be accessed by using the link: http://booksite.elsevier.com/9780123854872 . Contents of the companion website are set forth on pages xv-xvii in the text. Teaching Methods This course is taught through a combination of readings, cases and lectures. We begin each session with a discussion of current events. You are encouraged to visit dealbook.nytimes.com before each class to obtain a grasp of recent news. About the Instructor Lloyd Levitin is a Professor of Clinical Finance and Business Economics at Marshall. He was Executive Vice President and CFO of Pacific Enterprises from 1982-1995 (now Sempra Energy), and was actively involved in the firms diversification program which included numerous acquisitions. He testified as an expert on utility diversification to the Senate Finance Committee of the U.S. Congress and has been a consultant for JurEcon, Inc., a nationwide consulting and research firm for management and counsel. He has a MBA from Wharton and a JD from University of San Francisco. He practiced as a CPA after receiving his MBA, and as a tax attorney after receiving his JD.

Grading Summary: Points TESTS Mid-Term Final Exam 25 35 12 8 20 % of Grade 25.0% 35.0% 12.0% 8.0% 20.0%

CASE WRITE-UP: BCE INC.: IN PLAY (group project) PEER EVALUATION ON GROUP PROJECT CLASS PARTICIPATION

TOTAL

100

100.0%

Final grades represent how you perform in the class relative to other students. Your grade will not be based on a mandated target, but on your performance. Three items are considered when assigning final grades: 1. Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible). 2. The overall average percentage score within the class. 3. Your ranking among all students in the class. Midterm and Final Exam (Midterm 25% of your grade; Final 35% of your grade) The midterm and final exam will be closed-book, closed-notes. The final exam is cumulative from the beginning of the course. Laptops or any hand-held device with email capabilities cannot be used. You should bring a calculator to perform calculations. Case Write-Up (12% of your grade) There are 9 real world change of control case studies contained in the course packet. They involve 6 different actual M&A deals. (One M&A deal is divided into 4 different cases). Only 1 case BCE Inc.: In Play is to be handed in and graded. The questions you are to answer are contained on page 12 of this syllabus. This is a group project; your group cannot include more than 6 students. This project will count 12% of your grade. Peer Evaluation on Group Project (8% of your grade) Study groups provide a valuable learning experience how to work effectively and efficiently in groups (a common practice in Corporate America), learning from others, and sharpening a students ability to communicate with others. However, human nature being what it is, some students are tempted to relax and let others carry their load. In order to provide an incentive for all students to make maximum contributions to the team project, students will be asked to grade each team members contributions on a 1 to 8-point scale (8 representing the best performance).

This evaluation is to be submitted by email to the Instructor before the last day of classes. Any team member who does not email his (her) evaluation of team members will be deemed to have given a 10-point score to each member of the team. Class Participation (20% of your grade). Attendance and participation are essential for success in this course. The CLASS SCHEDULE AND ASSIGNMENTS are set forth on pages 7 to 8 in this syllabus. There are 7 cases assigned. Only one is to be handed in (Case #7: BCE Inc.: In Play). The other cases will be discussed in class. You may earn up to 20 points for class participation (i.e., 20% of your final grade). Each of you will be awarded these 20 points on the first day of class. Your objective will be to keep these 20 points throughout the semester. This requires attendance at classes and your participation in the discussion of the 6 cases that are not handed in. The questions for each of these cases are set forth on pages 9 to 11 of this syllabus. The answers that I am looking for to these questions are qualitative; extensive computations and/or spreadsheets are not required. I will cold-call to ask you to discuss one of the assigned questions, or additional ones pertaining to the case, and if it appears to me that you did not prepare for the case discussion, I will subtract one or two points from the 20 maximum. You may collaborate and discuss these cases with other students in the class. However, each student must have the necessary understanding of the case study to answer the questions in class. To help me out, you should bring a name card and place it on the desk in front of you. After the enrollment in the course has stabilized, I will pass around a seating chart. At that point, I ask that you remain in that seat for the rest of the semester. This will help assure that class participation is accurately recorded and rewarded. Academic Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect ones own academic work from misuse by others as well as to avoid using anothers work as ones own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, (www.usc.edu/scampus or http://scampus.usc.edu) contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A. Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/ . Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.

Student Disability Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to be as early in the semester as possible. DSP is located in STU 301 and is open 8:30 AM to 5:00 PM, Monday through Friday. The phone number for DSP is (213) 740-0776. For more information visit www.usc.edu/disability. Technology Policy Laptop and Internet usage is not permitted during academic or professional sessions unless otherwise stated by the professor. Use of other personal communication devices, such as cell phones, is considered unprofessional and is not permitted during academic or professional sessions. ANY e-devices (cell phones, PDAs, iPhones, Blackberries, other texting devices, laptops, iPods) must be completely turned off during class time. Videotaping faculty lectures is not permitted, due to copyright infringement regulations. Audiotaping may be permitted if approved by the professor. Use of any recorded material is reserved exclusively for USC students registered in this class. Retention of Graded Coursework Final exams and all other graded work which affected the course grade will be retained for one year after the end of the course if the graded work has not been returned to the student (i.e., if I returned a graded paper to you, it is your responsibility to file it, not mine). Class Notes Policy Notes or recordings made by students based on a university class or lecture may only be made for purposes of individual or group study, or for other non-commercial purposes that reasonably arise from the students membership in the class or attendance at the university. This restriction also applies to any information distributed, disseminated or in any way displayed for use in relationship to the class, whether obtained in class, via email or otherwise on the Internet, or via any other medium. Actions in violation of this policy constitute a violation of the Student Conduct Code, and may subject an individual or entity to university discipline and/or legal proceedings. Emergency Preparedness/Course Continuity In case of a declared emergency if travel to campus is not feasible, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies. Please activate your course in Blackboard with access to the course syllabus. Whether or not you use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard learning management system and support information is available at blackboard.usc.edu. Classes Cancelled Classes scheduled for April 16 and April 21 are cancelled. Make-up classes will be scheduled at the beginning of the semester. These make-up classes will be videotaped for those students unable to attend and posted to Blackboard.

MARSHALL GUIDELINES Learning Goals: In this class, emphasis will be placed on the USC Marshall School of Business learning goals as follows: Goal 1 Description Our graduates will understand types of markets and key business areas and their interaction to effectively manage different types of enterprises Our graduates will develop a global business perspective. They will understand how local, regional, and international markets, and economic, social and cultural issues impact business decisions so as to anticipate new opportunities in any marketplace Our graduates will demonstrate critical thinking skills so as to become future-oriented decision makers, problem solvers and innovators Our graduates will develop people and leadership skills to promote their effectiveness as business managers and leaders. Our graduates will demonstrate ethical reasoning skills, understand social, civic, and professional responsibilities and aspire to add value to society Our graduates will be effective communicators to facilitate information flow in organizational, social, and intercultural contexts. Course Emphasis Moderate

Moderate

High

Moderate

High

Moderate

CLASS SCHEDULE AND ASSIGNMENTS: FBE 460 SECTION DATE TOPIC ASSIGNMENT I. M&A Environment Jan 13 Introduction Text: Chapter 1: P. 21-33 Jan 15 Jan 20 Jan 22 II. Corporate Takeover Market Jan 27 Regulatory Environment HOLIDAY Causes of Merger Failure Alternative Takeover Tactics and Takeover Defenses Acquisition Planning and Implementation Acquisition Planning and Implementation, continued Acquisition Planning and Implementation, continued Integration DCF Valuation HOLIDAY Market and Transaction Multiples Application of Valuation Methodologies Analysis of a Major Acquisition: Strategy, Bid Process, Post-merger Integration MIDTERM Text: Chapter 8: P. 259-268; 272-274, 289 Text: Chapter 9 Case #1: WORLDCOM Text: Chapter 3; Case Study 3.2: Airgas Aborted Takeover of Airgas (P. 110) Text: Chapter 4 Text: Chapter 2

III. M&A Process

Jan 29

Feb 3

Text: Chapter 5

Feb 5

Case #2: Cadbury Schweppes: A and B cases Text: Chapter 6 Text: Chapter 7: P. 217-230

Feb 10 IV. Valuation of M&A Deals Feb 12 Feb 17 Feb 19

Feb 24

Feb 26

Case #3: Cadbury Schweppes: C and D cases

Mar 3

Based on Chapters 1-9, inclusive Text: Chapter 10 Case #4: Hewlett-PackardCompaq Merger

Mar 5 Mar 10

Valuation of Private Firms Analysis of HewlettPackard-Compaq Merger

CLASS SCHEDULE AND ASSIGNMENTS: FBE 460, continued SECTION DATE TOPIC ASSIGNMENT V. Deal Structuring Mar 12 Introduction to Deal Text: Chapter 11 and Financing Structuring Strategies Mar 17 -22 Spring Recess

Mar 24

Deal Structuring Tax and Accounting Issues Deal Structuring Tax and Accounting Issues, continued Debt Structuring Financing The Deal Deal Structuring Shareholder Voting, Risk Management, Social Issues, Putting It All Together Analysis of Proctor & Gamble Case Highly Levered Transactions Analysis of American Cyanamid Cases Business Alliances Restructuring Strategies

Text: Chapter 12

Mar 26

Mar 31

Text: Chapter 13

Apr 2

Apr 7

Case #5: Proctor & Gamble Acquisition of Gillette Text: Chapter 14 Case #6: American Cyanamid (A) and (B) Cases Combined Text: Chapter 15 Text: Chapter 16

Apr 9 Apr 14

VI. M&A Alternatives VII. Restructuring for Going Concerns VIII. Review

Apr 16 Apr 21

Apr 23 Apr 28 Apr 30

Analysis of BCE Case Course Review Course Review 4:30-6:30 P.M.

Case #7: BCE Inc.: In Play

Final Exam

May 7

Cumulative

Case #1: WORLDCOM INC.: WHAT WENT WRONG? (905M43) (Prepare for oral discussion; written submission not required) Teaching Objectives 1. Management of mergers and acquisitions in a turbulent environment. 2. Causes of M&A failure. Student Assignment 1. What are the major driving forces in the telecommunications industry? How have they affected the long distance business? 2. What was Worldcoms corporate strategy until 1997? Did it add value? 3. Why did Worldcoms acquisition of MCI fail to live up to expectations? 4. What were the leading causes of Worldcoms poor performance leading to the bankruptcy of Worldcom? Case #2: CADBURY SCHWEPPES: CAPTURING CONFECTIONERY (Prepare for oral discussion; written submission not required) A Case (9-708-453), B Case (9-708-454) Teaching Objective 1. To analyze a major acquisition in detail covering the overall corporate strategy, the bid process, and integration. 2. To illustrate synergy aspects of M&A. Student Assignment 1. As a member of the Board of Cadbury Schweppes would you approve a bid of more than $4 billion for Adams? What are the arguments for the acquisition and those against the acquisition? Case #3: CADBURY SCHWEPPES: CAPTURING CONFECTIONERY (Prepare for oral discussion; written submission not required) C Case (9-708-455) D Case (9-708-491) Teaching Objective 1. To study of how a large acquisition is actually integrated into another organization. Student Assignment 1. Why was the acquisition of Adams so successful? 2. What do you learn from this case about how to effectively utilize acquisitions as part of a successful corporate strategy? 3. Was Cadbury the best buyer of Adams?

Case #4: HEWLETT-PACKARD-COMPAQ MERGER (9-104-048) (Prepare for oral discussion; written submission not required) Teaching Objectives 1. Importance of sound strategic analysis in evaluating the merits of an acquisition. 2. Role of corporate boards in mergers and acquisitions. 3. Role of third parties (consultants, investment bankers, analysts, and institutional investors in M&A). Student Assignment 1. What were the strategic challenges faced by HP? 2. Does HP acquiring Compaq help HP deal with its strategic problems? 3. Evaluate the performance of HPs board of directors in the way they confronted the strategic issues facing Hewlett-Packard and for the way it handled itself in the merger. 4. What is your assessment of the role played by third parties consultants, investment bankers, analysts, and institutional investors in this deal? Case #5: PROCTOR & GAMBLES ACQUISITON OF GILLETTE (KEL183) (Prepare for oral discussion; written submission not required) Teaching Objectives 1. Analysis of synergies and valuation techniques supporting the deal. 2. Conflicts of interest for an investment bank in an M&A transaction. 3. Pros and cons of receiving shares or cash from both the perspective of the acquirer and target. 4. Fairness of large executive pay packages when there is a change of control. 5. Impact of politicians and regulators on M&A deals. Student Assignment 1. What were the potential synergies in P&Gs acquisition of Gillette? 2. In light of Gillettes large increase in shareholder value during James Kilts tenure, was his pay package reasonable and in the best interest of shareholders? 3. Discuss the positive and negative aspects of receiving shares or cash from the perspective of P&G and Gillette shareholders. 4. What are the possible reasons as to why P&G did not use a collar in the merger proposal? 5. Compare the valuation analyses in Case Exhibits 6-9. Based on this analysis, determine the bid range that you would recommend to P&Gs board of directors. 6. Discuss the conflicts of interest for an investment bank in an M&A transaction. 7. Discuss the possible impact politicians and regulators can have on an M&A deal. 8. Evaluate the role played by Warren Buffet in the merger.

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Case #6: AMERICAN CYANAMID (A) & (B) COMBINED (9-898-120) (Prepare for oral discussion; written submission not required) Teaching Objectives 1. To explore the factors influencing the market for corporate control and the boardroom dynamics associated with a hostile takeover offer. Student Assignment 1. Was AHPs decision to bid for Cyanamid a good one for both firms shareholders? What evidence would you cite to support your case? 2. What are the potential sources for value creation, if any, in an AHP/Cyanamid merger? 3. How did Cyanamids management respond to the AHP offer? Whose interests were they taking into account? Whose interests should be taken into account when considering a takeover offer? 4. How can we explain the fact that American Cyanamids managers continue to express a preference for the SmithKline Beecham asset swap even after Perellas analysis showed it to be a lower-valued alternative than the sale to AHP? 5. In your view, what per share value would the SmithKline asset swap have to generate to justify rebuffing the AHP offer? As a director, would you support management at a value of $85, which Ellberger suggests might have been sufficient to resist AHP? 6. Was MacAvoys assertion that he would go to the Wall Street Journal a reasonable response to his frustration with the boardroom processes? Why or why not, and from whose perspective? If you think it was a weak response, what would you suggest as an alternative? 7. What role does the market for corporate control play in the governance process? Is the market for corporate control pressuring managers at American Cyanamid to make a decision that is in shareholders short-term interest, but against the long-term interest of the company? 8. What factors have contributed to boards of directors inability to govern publicly traded corporations effectively? Which, if any, of these materialize in the boardroom conflict at Cyanamid? 9. Why has the pressure for directors to wake up become more intense in the 1990s than it was in the 1980s? Do you think corporate performance and competitiveness will improve as a result? Why or why not? 10. In a speech to MBA students at Northwestern, John Smale (former CEO of Proctor and Gamble and director of several Fortune 500 companies, including General Motors) stated: Certainly the pursuit of optimum value for the shareholders is an important obligation of the corporation, but it should not be the primary obligation. The primary obligation of management and of a board of directors should be to the corporation and its successful continuation. Let me repeat that for emphasis. The primary obligation of management and of a board of directors should be the corporation and its successful continuation. Do you agree or disagree? Why? How is this statement relevant to the boardroom dynamics at Cyanamid?

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Case #7: BCE INC.: IN PLAY (909N18) To be handed in and graded Teaching Objectives 1. Specifically, this case provides students with an opportunity to assess comparable trading multiples and consider why the target company may be trading at a discount or premium to its comparable peers. 2. Apply discounted cash flow analysis and precedent transaction analysis to determine the value of an acquisition target. 3. Gain a broader understanding of the leveraged buyout process and consider its advantages and disadvantages. 4. Construct an internal rate of return (IRR) analysis to determine the return a private equity investor could achieve within their respective holding period, based on the chosen total leverage multiple and the exit multiple. 5. Analyze the value impact of synergies to a strategic buyer and consider what maximum bid range might be appropriate, based on total synergies assumed. 6. Consider the various advantages and disadvantages of a bid from a strategic buyer relative to a bid from a private equity investor. 7. Assess the strengths and weaknesses of the four potential bidders. Student Assignment 1. Assess the strengths and weaknesses of the four potential bidders for BCE. 2. Determine what BCE is worth to the three private equity consortiums, based on relative valuations, precedent transactions, and discounted cash flow analysis (DCF). For the DCF analysis, assume the sale of non-core assets. 3. Determine the bid range that would be appropriate for Telus in light of the synergies deemed to be achievable. What other considerations would be important with a potential bid by Telus? 4. From a private equity consortium perspective, what is the potential internal rate of return (IRR) on the investment, given the proposed initial investment and exit price assumed in the case? How sensitive is the return to the amount of leverage and the exit price? 5. From the perspective of the bidder, what challenges might arise in financing such a large transaction? What strategic considerations would need to be taken into account, relative to other bids? What potential opportunities might exist to exit their investment in three to five years? 6. From the perspective of BCE, how might the Strategic Overnight Committee weigh the prospect of an all-cash bid from a private equity bidder against a potential cashand-stock bid from Telus? What price might the committee feel was adequate, given BCEs historical and recent share price performance? How would the committee ensure it was maximizing the value to BCEs shareholders?

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