The University of British Columbia Sauder School of Business , COMM471 Fall 2018 (updated as of September 18, 2018)

Instructor: Professor Kai Li https://sites.google.com/site/kailiubcsauder/ [email protected] HA 874 Office hours: Tuesday 3 - 5pm, or by appointment

Teaching Assistant: Iris Wang [email protected] HA 351C Office hours: Thursday 11am – noon, or by appointment

Course website: https://canvas.ubc.ca Power point slides and other course materials will be posted on the course website.

Learning Objectives This is a course on corporate mergers and acquisitions (M&A). The objective is for students to obtain skills that are necessary to structure a deal or form an opinion about a proposed transaction. The course is relevant for anyone seeking a career in , consulting, , private banking, or the corporate sector.

Upon completion of the course, students shall: • Have obtained a deep understanding of key issues in M&As • Know how to quantify synergies and compute a range for a target company • Understand the implications of different payment method choices and deal structures • Be able to identify, structure, and pitch an M&A transaction to a potential acquirer • Recognize key principles of successful negotiations • Be capable of working with a team to manage a large work load in a short period of time • Have gained confidence in presenting and defending their analysis in front of a large group

Topics The course covers a broad range of M&A related topics, such as synergies and value creation in mergers, choices of payment method, valuation of contingent payments, deal protection devices, incentive effects of deal financing, merger arbitrage, empty voting, bidding strategies, merger negotiations, leveraged , hostile , and defensive tactics. It also covers key elements of the legal and regulatory framework for takeovers, such as filing requirements, fiduciary duties of the target board of directors, and antitrust regulations.

Teaching Philosophy/Learning Approach This is a case based course, supported by lectures and visitors. While the readings are extensive, the emphasis of the course is on the analysis of assigned cases, your learning experience, and the final pitch. This is where you should focus your effort.

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Students have a responsibility to come well prepared and participate actively in the classroom discussion. You should be ready to discuss your analysis of assigned cases and to show your calculations. I encourage voluntary participation, but may call on any student to discuss the assignment.

Code of Conduct You may not use notes or other material from any previous offering of this course, or discuss the material with students who have already taken the course. This restriction extends to case-related information obtained from other sources.

Laptop Policy I do not allow the use of laptops or reading pads or mobile phones in class EXCEPT when we go over the valuation part of a case (when it is not easy to keep your notes in writing). If I see an open laptop, I assign a class participation score of -3 for that day.

Class Attendance Class attendance is mandatory. Students should attend every class, also those with invited speakers. While I may grant permission to miss a class for personal reasons, you need to ask for permission in advance. A student missing more than two classes without prior approval will fail the course.

Requirements/Evaluation Approximate Grade Composition 30% Best Four Out of Five Case Memorandum (done by group) 30% M&A Pitch Book (written part: 8%; in-class presentation: 22%) (done by group) 20% Ten Weekly Learning Journal (done individually) 20% Class engagement/participation (done individually)

Cases All cases can be purchased from the Harvard Business Publishing online via course pack at: https://hbsp.harvard.edu/import/561190

Please register with the Harvard Business Publishing before online purchase and please use internet explorer to access the website.

Alternatively, you can buy individual cases online yourself by searching case name and matching case ID.

There are a total of eight cases covered in the course. I will lead the first two case discussion (Ducati and Shenzhen Development Bank) – class participation is still required for these two cases, and student groups will write a memorandum for five other cases.

Each group case memorandum should be three pages of text maximum with single spacing and 12 pt font and 1 inch margins (roughly), plus any appendices that are necessary. Avoid simple repetition of case facts, and instead focus on analysis in your memorandum. Note that although limits are not imposed on tables and appendices, unnecessary or weak attachments are not helpful. Focus on impact and interest, not quantity. Check to make sure that all your attachments are really necessary and add value; eliminate those that do not clearly make the cut.

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Group case memorandum is due electronically to my teaching assistant Iris Wang at [email protected] before the beginning of the class when the case is discussed (see the deadlines below).

M&A Pitch Book The final project for the course will be to develop a pitch book for a proposed M&A transaction. Students will work in the same group, and take the point of view of an M&A advisor for either a potential acquirer or potential seller.

Each group pitch book (word doc) should be five pages of text maximum, with single spacing and 12 pt font and 1 inch margins (roughly), plus any appendices that are necessary. The pitch book is due electronically to my teaching assistant Iris Wang at [email protected] on the day of your group presentation (either by midnight of November 26 or by midnight of November 28, 2018).

In lieu of an exam, we will have the last week of class (November 26, and November 28, 2018) for students to make their group presentations of the pitch book (PPT slides). Each presentation should be about 15 minutes in length. Evaluation will have both the written and presentation components (written part: 8%; industry experts/instructor evaluation of the presentation: 15%; class evaluation of the presentation: 7%). Additional instructions are given at the end of this syllabus.

Weekly Learning Journal Each student will keep a learning journal with 10 weekly entries. This will include a one to two page discussion of the main learning points of each class and/or case, with single spacing and 12 pt font and 1 inch margins (roughly). The highest standard here would be to not simply repeat points from the class/case discussion, but to use the class/case discussion as an opportunity for further investigation. Consider (1) any open issues remaining at the end of the class/case that you would like to analyze further, (2) any current events that you can relate to issues discussed during the class/case, (3) any lectures or supplemental reading materials that you can relate to, and 4) any current events pertaining to the world of M&As that you can relate to concepts discussed in the class/case. The journal is an opportunity for you to go beyond what is covered in class and explore in more detail areas of special interest to you. It will be helpful if you keep up to date on your journal, rather than attempt to catch up on everything at the end of the semester. The work-in- progress version of the weekly learning journal is due electronically to my teaching assistant Iris Wang at [email protected] on October 17, 2018 (Wednesday) for the mid-of-the-term check and the final product is due on the last day of class (by midnight of November 28, 2018).

Class Engagement/Participation Students are expected to prepare for class and participate actively. Please bring name cards to each class and making yourself known to the instructor and the teaching assistant Iris Wang is essential to receive any mark (in a scale of 0-3 for each session) for this component of the course evaluation.

Group Formation/Peer Review Students will work in the same group of five or fewer people within the same section for all group- based assignments.

For Section 101, please sign up for group membership at: http://bit.ly/2018C471S101

For Section 102, please sign up for group membership at: http://bit.ly/2018C471S102

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If you have any question or difficulty forming a group by the end of the second week into the term, please contact my teaching assistant Iris Wang at [email protected]

At the end of the term, students grade the contribution of his/her team members. The peer review requires you to behave in a responsible and respectful manner. If I deem a student to deviate from such behavior, I may overrule the peer review.

References Two extremely useful books on M&As are: P. A. Gaughan, Mergers, Acquisitions, & Corporate Restructurings, 7th Edition J. Rosenbaum, J. Pearl, Investment Banking: Valuation, Leveraged Buyouts and Mergers and Acquisitions, 2nd Edition

Important Deadlines/Dates

Sept. 17: Ducati – led by instructor

Sept. 24: Shenzhen Development Bank – led by instructor

Oct. 1: Canadian Pacific’s Bid for Norfolk Southern

Oct. 15: Roche

Oct. 17: Work-in-progress Learning Journal (checkpoint, not mandatory) Guest speaker: Tracey McVicar Managing Partner CAI Capital Management Co.

Oct. 24: Dow

Oct 29: Guest speaker: Jill Leversage

Nov. 5: Mylan King Guest speaker: Jenny Chen, PhD, CFA, CC&L

Nov. 14: Hertz

Nov. 26/28: Pitch Book due on the day of your group presentation

Nov. 28: Learning Journal

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Course Outline (Please check course website for any update)

Week 1: Course Introduction

Weeks 2-4: M&A Valuation Readings: Rosenbaum & Pearl, Chapters 1, 2, 3 Gaughan, Chapters 8, 9, 15 Sample Case: Ducati & Texas Pacific Group, Product #: 801359-PDF-ENG Sample Case: Shenzhen Development Bank (SDB), Product #: 210020-PDF-ENG

Ducati case assignment questions for class discussion:

1. On a scale from 0 to 10, with 0 representing the prototypical financial buyer transaction, and 10 representing the prototypical strategic buyer transaction, where would you place this deal? Why? 2. To value the 51% of Ducati that TPG is contemplating acquiring, outline the steps you would take. It is optional to actually complete the valuation. More importantly, describe – each step you would need to take in the valuation process – what data you would need to complete that step – what data in the case is available that is needed (referring to Exhibit numbers / pages) 3. How much should TPG be willing to bid? How does this relate to your answers in questions 1 and 2?

SDB case assignment questions for class discussion:

1. What makes Shenzhen Development Bank (SDB) an attractive target for investment, and what are the potential sources of value? 2. What are the key risks for investing in SDB, and how can Newbridge mitigate these risks? 3. Why can Newbridge win the deal? What is the value-added from Newbridge as a private equity investor? 4. Is Newbridge paying the right price for SDB? What is an appropriate valuation range? 5. Why has the Newbridge-SDB deal failed to go through the transition stage? What are the key lessons that can be learned from the failure? 6. Given the public falling-out, should Newbridge continue to pursue the investment or should it walk away? If Newbridge decides not to give up, what should it do immediately to save the deal, and what should be the key initiatives in Newbridge’s turnaround plan post-investment?

Weeks 5-7: Legal Framework, Transaction Structuring, and Hostile Takeovers Readings: Gaughan, Chapters 1, 3, 4, 5, 6 Case: Canadian Pacific’s Bid for Norfolk Southern, Product #: 216057-PDF-ENG Case: Roche’s Acquisition of Genentech, Product #: 210040-PDF-ENG

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CP case assignment questions: 100 marks

1. Why is Canadian Pacific pursuing a merger with Norfolk Southern? Do you believe there is a convincing rationale for the merger? (10 marks) 2. Based on the forecasts provided in Exhibit 6, what is the “stand-alone” value (absent any merger) of a Norfolk Southern share as of December 31, 2015? Assume a weighted average (WACC) of 7.9%, the market risk premium of 5.5%, and a tax rate of 36%. How does your valuation compare to the values of comparable publicly traded railroads and the transaction prices paid in previous acquisitions? (20 marks) 3. What is the present value of the projected merger benefits in Table A as of December 31, 2015, assuming CP and NS merge and are expected to achieve 100% projected merger benefits? Are the projections reasonable? (20 marks) 4. Assume that the “stand-alone” value of a Canadian Pacific share is $135 and the “stand- alone” value of a Norfolk Southern share is $80 prior to the bid, that both CP and NS shareholders vote to combine the two companies, and that the STB is expected to approve the CP-NS merger in 2017. What is the value of a combined (merged) CP-NS share as of December 31, 2015? What are the key determinants of your valuation? (20 marks) 5. Why did Canadian Pacific “sweeten” its revised offer by including a Contingent Value Right (CVR) ? What specific concern is the proposed CVR designed to address? What is the CVR worth? (20 marks) 6. As a Norfolk Southern shareholder, would you vote to accept the current offer? As CEO James Squires, would you recommend that the board accept or reject the current CP offer? (10 marks)

Roche case assignment questions: 100 marks

1. Why is Roche seeking to acquire the 44% of Genentech it does not own? From Roche’s point of view, what are the advantages of owning 100% of Genentech? What are the risks? (10 marks) 2. As a majority shareholder of Genentech, what responsibilities does Roche have to the minority shareholders? (5 marks) 3. As of June 2008, what is the value of the synergies Roche anticipates from a merger with Genentech? Assess the value of synergies per share of Genentech. Please use 9% weighted average cost of capital in your analysis. (20 marks) 4. Based on DCF valuation techniques, what range of values is reasonable for Genentech as a stand-alone company in June 2008? Please exclude synergies from your valuation and use a 9% weighted average cost of capital. You can assume that as of the end of June 2008, Genentech held approximately $7 billion in cash, which included investments and securities that were not needed in its daily operations (Note: Exhibit 10 is a good starting point for this analysis). (20 marks) 5. What does the analysis of comparable companies (Exhibits 12, 13, and 14) indicate about Genentech’s value within the range established in question 4? (15 marks) 6. How has the financial crisis affected Genentech’s value? What changes in valuation assumptions occurred between June 2008 and January 2009? (10 marks) 7. How did Genentech’s board and management respond to Roche’s offer of $89 per share? (5 marks) 8. What should Franz Humer do? Specifically, should he launch a for Genentech’s shares? What are the risks of this move? What price should he offer? Should he be prepared to go higher? How much new financing will Roche need to complete the tender offer? (15 marks)

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Weeks 8-11: Transaction Structuring and Shareholder Activism Readings: Gaughan, Chapters 1, 3, 7 Case: Dow’s Bid for Rohm and Haas, Product #: 211020-PDF-ENG Case: Mylan Laboratories Proposed Merger with King Pharmaceutical, Product #: 214078-PDF-ENG

Dow case assignment questions: 100 marks

1. Why does Dow want to buy Rohm and Haas? Was the $78 per share bid reasonable? (40 marks) 2. What are the major deal risks inherent in this merger transaction? How and to whom does the merger agreement allocate these key risks? Hint: analyze the various provisions in case Exhibit 4. What risk does each provision address and which party ultimately bears the risk? (20 marks) 3. As of early February 2009, what should Andrew Liveris (Dow’s CEO) do and what should Raj Gupta (Rohm and Haas’ CEO) do? (25 marks) 4. If you were the judge (Honorable William B. Chandler, III) in the Delaware Court of Chancery, how would you resolve this legal dispute? (15 marks)

Mylan case assignment questions: 100 marks

1. Does this deal create value? Is it a good deal for Mylan? For King? (45 marks) 2. Shareholders in both Mylan and King must vote in favor of the merger for it to go ahead. What does the reaction of the firms’ prices to the announcement of the merger suggest about how each group should vote? (15 marks) 3. Use the information contained in the market prices to form an assessment of the likelihood of the merger being consummated. (20 marks) 4. What is Perry Capital trying to achieve, and why? Consider the various ways in which they could structure their trade in order to achieve this end. Should the SEC aim to prevent future similar trades, and if so, how? (20 marks)

Weeks 11-12: Leveraged Buyouts Readings: Gaughan, Chapters 8, 9 Rosenbaum & Pearl, Chapters 4, 5 Case: Bidding for Hertz, Product #: UV1056-PDF-ENG

Hertz case assignment questions: 100 marks

1. How does the dual-track process used by Ford to initiate “consideration of strategic alternatives” affect the bidding process for Hertz? (10 marks) 2. In what ways does Hertz conform or not conform to the definition of an “ideal LBO target”? Do you believe Hertz is an appropriate target? (10 marks) 3. Strategically, what value-creating opportunities can the sponsors exploit in this transaction? (5 marks) 4. How realistic are the key assumptions that underlie the Bidding Group’s projections in case Exhibits 8, 9, and 10? Which assumptions are most likely to have the largest impact on returns? (15 marks)

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5. Based on the base-case estimates in case Exhibits 8, 9, and 10 and your estimate(s) of if the sponsors put up $2.3 billion in equity, what return can they expect to earn? (30 marks) 6. If Carlyle desires a 20% target return on its equity investment, does your analysis suggest that $2.3 billion is too much to pay, or can it afford to pay more—in either case, by how much? (10 marks) 7. What is the value of Hertz using the Equity Cash Flow method of valuation? (10 marks) 8. What is the market-required rate of return for this investment, and why might this differ from the sponsors’ target return? (10 marks)

Week 13: M&A Pitch Book Presentation

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Instructions for M&A Pitch Book

The final project is to develop a proposal for an M&A transaction. Your point of view should be as an M&A advisor for either a potential acquirer or potential seller.

The only restrictions I make on your choice of the client is that it be a publicly traded company with sufficient data available to make informed recommendations. Your final product will consist of two items:

• A five-page write-up of your proposed transaction in word doc, to be handed in via email to my teaching assistant Iris Wang at [email protected] on the day of your group presentation by midnight.

• A final “pitch” in PPT slides to be presented, in about 15 minutes or less, during the last week of class.

Below is a possible outline format for a potential buyer (change accordingly if your client is a seller):

1. The strategic situation of your client, and why an acquisition is a plausible way to increase shareholder value.

2. Why the proposed target or buyer makes sense in light of the above; specific ways in which its acquisition would make strategic sense to your client; emphasize the economic synergies that would be generated, and the extent to which those synergies would be unique to this transaction

3. Why the target might be available, e.g., large block of stock in the hands of someone who might want to sell, an aging founder of a private firm with no apparent successor, etc.

4. A list of other potential acquirers and/or targets, and why this particular deal dominates other potential combinations (for example, an investment bank looking for an acquirer for a specific seller often will start with all potential candidates, and break these down into A list, B list, and C list buyers.)

5. Preliminary valuation of the target as a stand-alone entity, plus an assessment of possible synergy. As much as possible, try to create a tight link between the quantitative assessment of synergies here and the economic logic of the transaction explained earlier.

6. Explain key due-diligence issues that will need to be answered before a final agreement on value is reached.

7. Proposed approach to target and proposed structure of the offer, e.g., a friendly meeting to discuss a merger or a formal tender offer, an all cash offer or stock-swap or some combination, etc. You should include both an initial offer and an upper bound for what your client should be prepared to pay.

8. Potential legal-regulatory-antitrust hurdles that need to be considered.

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9. Principal issues in a successful integration of the target/buyer with your client’s operations.

The above are not required, they are just ideas to get you started. A little creativity usually ends up in a better product than simply following boilerplate, so I leave the rest up to you.

If you choose a target as a client (in that case you are looking for a buyer), you have to turn the exercise on its head a bit, but the principles are the same. Following the discussion above, one thing I like to see early on in this type of presentation is a list of potential buyers, broken down into categories (A list – good candidates, B list – maybe, C list – unlikely), with short explanation. This is also a good exercise to go through if your client is a buyer.

For a merger of equals, you could choose your client to be either of the two parties and focus on that point of view.

Have fun!

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