From Spring 2007 semester. Spring 2008 syllabus will be somewhat different.

UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business Revised Syllabus for FBE 560-Mergers and Acquisitions Office Hours T,TH 1:30-3:00 and TH 5:00-6:00 in HOH701E Spring 2007 I. Purpose of the M&A Course This course covers the broad field of mergers, acquisitions, and divestitures. The primary objective of the course is for each student to gain a well-rounded understanding of the major strategic, economic, financial, and governance issues of mergers and acquisitions. Takeovers and mergers are a daily fact of life and have evolved into a critical part of every CEO or managers strategic toolbox. Every person who enters the corporate world will most likely be affected by a merger or acquisition at some point in their career. Students will apply learned content to real mergers and acquisitions and have the opportunity to present to the class their findings and conclusions. Specific academic course objectives include: Examining the role that M&A plays in the contemporary corporate world, and its use as a strategic tool to provide growth, enhance competitive position, transform a company or industry, and create shareholder value. To provide the student a framework for analyzing transactions including understanding strategic rationale, valuation methodologies, deal structures, bidding strategies, and the need for a value proposition. Show how M&A can be used successfully as well as its pitfalls, dangers and risks.

The course will utilize a combination of lectures, readings, cases and student projects. II. Text Required Text: Applied Mergers and Acquisitions, by Robert F. Bruner, University Edition (Wiley, 2004). Optional Text: Big Deal: Mergers and Acquisitions in the Digitial Age by Bruce Wasserstein (Warner Books, 2000).

III.

Research Material Library information and the World Wide Web provide a wealth of resources useful for evaluating M&As. Suggested resources are: 1. Marshall Electronic Library 2. 3. See attached Research Guide using Marshall Electronic Resources.

Company websites Yahoo or Google

IV.

Procedural Matters Student assignments include: 1. Being prepared to discuss questions and/or problems that will be posted to Blackboard throughout the semester. They do not have to be turned in and will be posted at least 1 week before discussion date. Suggested solutions will not be posted. Two team projects which will be turned in, and graded, and in addition, will be presented to the class on the dates designated in the attached Schedule of Topics and Assignments. These team projects are: Analysis of a large failed M&A transaction. Study of causes and effects of a recent large (over $1 billion) acquisition.

2.

The requirements for each of these team projects are set forth in a later part of this syllabus. Teams of six (6) are to be formed during the first week of class, and a team leader is to be selected. The team leader is to email me the members of their team before January 16, 2007. Any students needing help to get into a team should email me before then. V. Grading Two Team Projects (25% each) Class participation Peer Evaluation Final exam 50% 10% 10% 30% 100%

VI.

Team Project #1: Merger & Acquisition Failure Study The objective of this study is to select a merger or acquisition that has been judged a failure. By focusing on M&A failure youll gain valuable perspectives on how managers can improve the odds of M&A success. Your group will prepare a paper on the acquisition selected and present your findings to the class. Your group is to choose an acquisition from the list below of selected M&A transactions that have been judged a failure (see page 5). The group team leader is to email the instructor your first, second and third choice by January 23, 2007. The instructor will inform you of your assigned acquisition by January 26, 2007. An outline of the topics your paper should cover is stated below: A. ECONOMIC SETTING OF BUYERS INDUSTRY 1. 2. 3. 4. B. Important characteristics of the industry. Challenges faced by the industry over the 5 years prior to the transaction. Industry trends, if applicable, prior to the transaction. Outlook for the industry over next 5-10 years as of time of transaction.

BUSINESS ECONOMICS REASONS FOR THE TRANSACTION 1. 2. Reasons stated in SEC filings, annual report, and the deal announcement. Reasons stated in financial press.

C.

STRATEGY 1. 2. 3. 4. How did this particular transaction fit into the broad strategy of the acquiring firm? The selling firm? Was the acquisition related or unrelated to buyers operations at time of deal? If related, explain how they are related. If unrelated, did this appear to occur because growth opportunities for the buyers industry as a whole were not favorable or were opportunities lacking just for the individual firm studied?

D.

TERMS OF THE TRANSACTION 1. 2. 3. Describe deal structure. How large was the premium paid to the target? How was the deal financed?

E.

INITIAL REACTION TO DEAL 1. Stock market reaction (sharp rises or declines in security prices upon announcement of the deal require additional discussion). 2. Security analyst reaction. 3. Financial press (WSJ, Business Week, Forbes, etc.) reaction. VALUE CREATION 1. 2. How did buyer expect to create value? Describes sources of value creation.

F.

G.

DEAL HISTORY 1. 2. 3. 4. 5. 6. What was the length of discussions between buyer and seller? Describe offers and counter-offers, changes in deal terms Describe other bidders (if any). Describe defensive measures employed by seller either before or after the deal announcement. Describe proxy fights, court battles, if any. Describe any deals made with regulatory authorities to gain approval of deal.

H.

COMPARISON TO OTHER ACQUISITIONS OF BUYER 1. 2. How did this acquisition compare to others, if any, made by buyer in previous 5 years with respect to size and premium paid? Did this acquisition break the strategic pattern of usual transactions by the buyer?

I.

IMPACT OF ACQUISITION ON BUYER 1. 2. Initial impact of deal on buyers financial statements (e.g., changes in debt/capital ratio; EPS accretion or dilution). Initial changes after the transaction due to acquisition (e.g., layoffs, divestitures, changes in sellers management).

J.

POST-MERGER PERFORMANCE (FROM CLOSING TO NOW) 1. 2. 3. How did the economy and industry perform subsequent to the subject acquisition? How did the buyer perform subsequent to the acquisition? (Include impact on firms financial health, organization structure, market position and reputation.) How do you think the firm would have performed absent the acquisition?

K.

CONCLUSIONS 1. 2. 3. Why did the acquisition fail (note checklist page 640 of text)? With the benefit of hindsight, if you were CEO of buyer, what would you have done differently? Lessons you learned from your study.

List of Selected M&A Transactions That are Judged Failure (Pick one to study for Team Project #1) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Acquisition of Southern Pacific by Union Pacific (1996) The Acquisition of Columbia Pictures by Sony Corporation (1989) The Acquisition of NCR Corporation by AT&T Corporation (1991) Acquisition of CUC International by HFS (1997) Mercks Acquisition of Medco (1993) Acquisition of Snapple by Quaker Oats (1994) Mattels Acquisition of The Learning Company (1999) Merger of AOL and Time Warner (2001) Merger of Pennsylvania and New York Central Railroads (1968) Acquisition Program of Tyco International. United Air Lines Acquisitions of Hilton Hotels and Hertz (mid-1980s). Sears, Roebuck Acquisitions of Dean Witter Reynolds and Coldwell Banker (1981) Northwest Airlines Acquisition of Republic Airlines (1986) Merger of Burroughs Corporation and Sperry Corporation (1986) to form Unisys. Acquisition of HBO & Co. by McKesson Corp. (1998).

VII.

Team Project #2 Study of Causes and Effects of a Recent Large (over $1 billion) Acquisition The objective of this study is to analyze a recent large acquisition announcement to identify the causes and effects of the particular acquisition move. Your group is to choose a large acquisition announcement from the attached list of Selected Large Acquisition Announcements For Last Three Years. (See pages 10 and 11.) Some of these deals may be closed, some still pending, some busted-up by third parties, and others canceled. In some cases, the buyer is a publicly-traded company, in others the buyer is a private firm or a private equity fund. Your group will prepare a paper on the acquisition selected and present your findings to the class. The objective is to get each group to select a different acquisition. Therefore, your team leader is to email the instructor your first, second and third choices for this study by January 30, 2007. The instructor will inform you of your assigned acquisition or merger by February 6, 2007. A suggested outline of the topics your paper should cover is presented below. If your buyer is not publicly-traded, you may find it impossible to cover all the topics. In that case, make any changes you deem appropriate. Of course, you may want to augment this outline to include material that you deem relevant under the circumstances. A. ECONOMIC SETTING OF THE BUYERS INDUSTRY 1. 2. 3. 4. B. Important characteristics of the industry. If the buyer is a private firm or private equity fund, discuss the characteristics of their industry. Challenges faced by the industry over the 5 years prior to the transaction. Industry trends, if applicable, prior to the transaction. Outlook for the industry over next 5-10 years as of time of transaction.

BUSINESS ECONOMICS REASONS FOR THE TRANSACTION 1. 2. Reasons provided by Buyer and Seller stated in SEC filings, annual report, and announcement of the transaction. Reasons stated in financial press.

C.

STRATEGY 1. 2. 3. 4. How did this particular transaction fit into the broad strategy of the acquiring firm? The selling firm? Was the acquisition related or unrelated to buyers operations at time of deal? If the buyer is a private firm or private equity fund, discuss whether the buyer has invested in this industry before. If related, explain how they are related. If unrelated, did this appear to occur because growth opportunities for the industry as a whole were not favorable or were opportunities lacking just for the individual firm studied?

D.

TERMS OF THE TRANSACTION 1. 2. 3. Describe deal structure at time of announcement. How large a premium was offered to the target? How will the deal be financed?

E.

INITIAL REACTION TO DEAL 1. 2. 3. Stock market reaction (sharp rises or declines in security prices upon announcement of the deal require additional discussion). Security analyst reaction. Financial press (WSJ, Business Week, Forbes, etc.) reaction.

F.

VALUE CREATION 1. How did buyer expect to create value? 2. Describes sources of value creation.

G.

COMPARISON TO OTHER ACQUISITIONS OF BUYER 1. 2. How did this acquisition compare to others, if any, made by buyer in previous 5 years with respect to size and premium paid? Does this acquisition break the strategic pattern of usual transactions by the buyer?

H.

COMPARISON TO OTHER ACQUISITIONS MADE BY MAJOR COMPETITORS 1. Select two or three key competitors of Buyer and compare the recent acquisition program (last 3-5 years) of these companies to that of the Buyer. (If the buyer is a private equity fund, discuss the acquisition program of other similar funds.)

2.

Is the role of acquisitions (size and type) similar for each of the 2 or 3 major firms studied? Do the competitors rely more on internal growth? If not, discuss any differences.

I.

IMPACT OF ANNOUNCED ACQUISITION ON BUYERS FINANCIAL STATEMENTS 1. Based on the announced deal, what effect would consummation have on buyers debt ratios, credit ratings and earnings?

J.

IMPACT OF ACQUISITION ON INDUSTRY STRUCTURE 1. 2. 3. Was the buyers announcement preceded by other large acquisitions in the same industry? If your answer to 1 above is yes, what influence do you think the prior acquisitions had on the decision for the buyer to announce this deal? Was the buyers announcement followed by other large (over $1 billion) acquisitions in the same industry? List these acquisitions and whether you believe they were motivated or a result of the buyers acquisition under study. Do you believe the acquisition under study will cause more acquisitions in the buyers industry? Why? What impact do you believe the acquisition under study will have on the buyers market share? On buyers competitive advantage? On growth? On profitability?

4. 5.

K.

DEAL HISTORY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. What was the length of discussions between buyer and seller? Describe offers and counter-offers, and changes in deal terms. Describe other bidders (if any). Describe defensive measures employed by seller either before or after the deal announcement. Describe proxy fights, court battles, if any. Describe any deals made with regulatory authorities to gain approval of deal. As of the date of this report was the deal closed, busted-up by a third-party buyer, cancelled or still pending? If the deal was cancelled, discuss the reasons. If the deal is still pending, discuss whether the acquisition is taking longer to complete than original anticipated, and if so, why. If the deal was busted-up by a third-party buyer, discuss how this occurred. Was the buyer compensated by a termination fee? Was action by the third-party buyer foreseeable?

L.

SUBSEQUENT PERFORMANCE AND APPRAISAL (ASSUMING DEAL CLOSED) 1. 2. Initial changes after the transaction due to acquisition (e.g., layoffs, divestitures, changes in sellers management). Measure the performance of the Buyer and the selected 2-3 key competitors by: (1) Total return to shareholders over past 5 years. (2) Return on equity over this time frame. (3) Compare (1) and (2) above to benchmarks such as industry total return and return on equity. 3. 4. Has the Buyer firm performed well for its shareholders over this time frame? Does there appear to be any differences between the performance of the Buyer and the two or three key competitors selected? Does this difference appear to be attributable to the degree the firm relied on external growth? With the benefit of hindsight, did the Buyer make mistakes with its major strategies and investment thrusts (both internal and external)?

5.

M.

LOOKING AHEAD 1. 2. 3. Has the Buyer positioned itself wisely in relation to its industry for future value creation? Discuss your reasoning. What are some major changes in strategic direction the Buyer firm could make to improve its current performance and prospects? What must buyer still do to make this acquisition successful?

N. 1. 2. 3. 4. 5.

ADDITIONAL TOPICS IF BUYER IS NOT A PUBLICLY-TRADED FIRM Why is the target more valuable as a private company? Why did the target decide to go private? What can the buyer do for the target that the targets top executives cannot do for its existing shareholders? Will the buyer be able to realize operating synergies? If not, what can the buyer do that a strategic buyer cannot? Do you think that the acquisition will be too highly leveraged? Explain.

O.

DRAWING SOME CONCLUSIONS 1. 2. 3. 4. 5. Which of the companies studied (Buyer and 2-3 key competitors) seemed to have followed the best strategy and execution? Does one company appear to be consistently better than the others? What is the source of its superiority? If you were the Buyers CEO, would you have done anything differently? Explain. Do you think the Buyer will create value on this acquisition? Why or why not?

SELECTED LARGE ACQUISITION ANNOUNCEMENTS FOR LAST THREE YEARS

Buyer Seller 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Koch Industries Georgia Pacific Corp. Procter & Gamble Co. Gillette Co. Boston Scientific Corp. Guidant Corp. Conoco Phillips Mobil Corp. FPL Group Inc. Constellation Energy Group Inc. Duke Energy Corp. Cinergy Corp. Exelon Corp. Public Service Enterprise Group Inc. Federated Department Stores Inc. The May Department Stores Co. K-Mart Holding Corp. Sears, Roebuck & Co. (Statutory merger) Bank of America Corp. MBNA Corp. JPMorgan Chase & Co. Inc. Bank One Corp. (Statutory merger) Prices Offered (billions) $12.5 $57.9 $26.5 $34.8 $11.1 $8.8 $13.5 $11.6 $10.4 $34.5 $57.6 Year Announced 2005 2005 2005 2005 2005 2005 2004 2005 2004 2005 2004

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Buyer Seller 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Investor Group Albertsons Walt Disney Pixar Investor Group HCA Anadarko Petroleum Kerr-McGee Johnson & Johnson Pfizer Consumer Healthcare Investor Group Univision Communications Wachovia Golden West Financial Investor Group Kinder Morgan Regions Financial AmSouth Bancorp AT&T Bell South Capital One Financial North Fork Bancorp McClatchy Knight Ridder U.S. Airways Group Delta Air Lines (Hostile bid) Investor Group Clear Channel Investor Group Harrahs Entertainment

Prices Offered (billions) $17.3 $6.1 $32.1 $18.2 $16.6 $13.4 $25.5 $24.0 $10.0 $89.4 $15.1 $6.7 $8.8 $18.8 $17.1

Year Announced 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006

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VIII. Suggestions For Class Presentation of Two Team Projects 1. 2. 3. IX. Make a 1-3 page outline of the main ideas that you are covering. Prepare PowerPoint presentations that will last no longer than 20 minutes. Try to make the material interesting.

Class Participation Ten percent of the course grade is awarded for class participation. This grade will reflect my assessment of both the quantity and quality of the individuals contribution to class learning. Students will be asked to discuss solutions to the questions and problems assigned. A student called upon to discuss the assignment for the day, and is not present, or hasnt worked the problem, will suffer a reduction in the class participation grade.

X.

Peer Evaluation 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 to 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 study group, students will be asked to grade each team members contributions on a 0 to 10 point scale. This evaluation is to be submitted by an email to the Instructor before the last day of classes. Any team member that 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.

XI.

Academic Integrity The use of unauthorized material, communication with fellow students during an examination, attempting to benefit from the work of another student, and similar behavior that defeats the intent of an examination or other class work, is unacceptable to the University. It is often difficult to distinguish between a culpable act and inadvertent behavior resulting from the nervous tensions accompanying examinations. Where a clear violation has occurred, however, the Instructor may disqualify the students work as unacceptable and assign a failing mark on the paper.

XII.

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.

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XIII. SCHEDULE OF TOPICS AND ASSIGNMENTS Date 1/9 1/11 1/16 1/18 1/23 1/25 1/30 2/1 2/6 2/8 2/13 2/15 2/20 2/22 2/27 3/1 3/6 3/8 3/20 3/22 3/24 3/29 4/3 4/5 4/10 4/12 4/17 4/19 4/24 4/26 5/8 Topic Review of M&A Drivers of Mergers Merger Proxy Statement Ethics in M&A Does M&A Pay? Cross Border M&A Strategy Acquisition Search Due Diligence Valuation Approaches Valuation Approaches Valuing Synergies Valuing Highly Levered Deals Valuing Liquidity and Control Accounting for M&A Student Reports on T.P. #1 Student Reports on T.P. #1 Student Reports on T.P. #1 Deal Structuring Deal Structuring continued Deal Structuring continued Post Merger Management Issues Governance in M&A Legal Framework Negotiation Issues Hostile Takeovers Takeover Defenses Student Reports on T.P. #2; Communication Student Reports on T.P. #2; Post Merger Integration Student Reports on T.P. #2; Review Final Exam 11am-1pm Bruner Chapter

1, 2, 3 4 5 6 7 8 9 11 13 15 16 17 18 19 20 21, 22 23 24, 25 26, 27 28, 29 30, 31 32 33, 34 35 36 38

Note: Questions and/or problems may be assigned for class discussion as course progresses. These additional assignments will not have to be turned in but students are expected to be able to discuss them in class and the class participation grade will reflect students contribution to class discussion.

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FBE 560: Mergers & Acquisitions Research Guide Using Marshall Electronic Resources
Crocker Librarys homepage = www.marshall.usc.edu/library Click on Electronic Resources to access all Marshall databases Click on USC Libraries Electronic Resources to access all USC databases Connecting to Marshall Electronic Resources from off-campus: http://www.marshall.usc.edu/web/Library.cfm?doc_id=6167 Articles: ABI/Inform Global by ProQuest
Use to find articles in newspapers, magazines, trade journals and academic journals including the Wall Street Journal Click on Databases Selected to capture the entire ProQuest index Search multiple keywords at the Advanced search screen Select Company/Org from the drop-down choices when searching for a specific company Use Topics tab search by specific subjects (Merger & Acquisitions) Use tabs to sort results by source including Scholarly Journals and Trade Publications Use Publications tab to find specific titles (Wall St. Journal, The Economist, Forbes, Fortune, Business Week, Mergers & Acquisitions, Barrons, etc.) Click on the Set Up Alert button to receive by e-mail articles to be published in the future

Lexis/Nexis
Find more regional and global news sources by doing a Guided News Search Click on the Business module link to find articles on Industry & Market information, plus company financials and SEC filings

Company Information: Hoovers

Find company profiles and follow the left-hand menu links for financials, history, executive biographies, competitors and competitive landscape, and SEC filings Use the Build Custom Report function to create a PDF company profile document

Mergent Online
Find company information, financials (including restated) for 15 years, ratios and PDF annual reports

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Use the Company Analysis List function to run metrics on up to 500 companies

ValueLine
Find company tear sheets and industry overviews (access through Investment Survey link ) Historical ValueLine access files are available on the msbcdrom drive on Marshall School of Business networked computers. In Windows Explorer, type \\msbcdrom\vl\_historical to access files going back to 1987.

Industry Information: Standard & Poors NetAdvantage

Click on the Company tab to find tear sheet information on companies Click on the Industry tab to retrieve pre-defined industry reports that include company comparables and ratios Use the Printer Friendly link to save and print pages, or the PDF link to download the entire report

Investext Select
Find analyst reports on specific companies or industries as a whole

OneSource Business Brower

Use this database to find company profiles, industry ratios, market reports and analyst reports. Database access does not require USC network connectivity. All MBAs are issued a unique password to OneSource contact Kim Esser (kim.esser@marshall.usc.edu) if you have forgotten yours.

Related Resources: Crocker Librarys Mergers & Acquisitions resource webpage: http://www.marshall.usc.edu/web/Library.cfm?doc_id=6202 Mergerstat Review (Crocker Library Reference HD2741 .M487) Published annually; Crocker Library has the latest five years Mergers & Acquisitions from A to Z / by Andrew J. Sherman and Milledge A Hart (American Management Association, 2005; 2 nd edition) Available full-text online through eBrary (http://site.ebrary.com/lib/uscisd/) USC network connection required

Please contact the Crocker Library Staff if you have any questions or need additional information:

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Kimberly Esser John Juricek Ed Tinoco Reference Desk

(213) 740 -6255 (213) 740-7621 (213) 740-9167 (213) 740-8520

kim.esser@marshall.usc.edu juricek@marshall.usc.edu etinoco@marshall.usc.edu library@marshall.usc.edu

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