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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.
