Management 373
Prof. Gary R. Evans
Corporate Financial Policy and Strategy

Spring 1999

Course Outline

Welcome to Management 373, Corporate Financial Policy and Strategy. Perhaps a more appropriate title for the course would be the title of the text we are using in this class, Takeovers, Restructuring, and Corporate Governance. This generally is a course where we explore mergers and acquisitions, corporate takeovers, strategy, valuation, restructuring, divestitures, leveraged buyouts, and other matters related to corporate policy.

This course blends lectures, team activity (a lot of that), outside research, a text, and case studies to accomplish our goal. The course provides a nice blend of academic theory with directly practical information - there is, for example, considerable emphasis on how things are done by corporations involved in M&A activity along with empirical, scholarly evaluations of the impact of M&A events, what seems to work and what doesn't, who benefits and who doesn't, and so forth.

The textbook used for this course is entitled Takeovers, Restructuring, and Corporate Governance, by J. Fred Weston, Kwang S. Chung, and Juan A. Siu, published by Prentice Hall, 2nd edition (do not buy the first edition) All students are also required to subscribe to The Wall Street Journal and are expected to read it - especially discussions of merger activity - daily.

This course outline comes with a Course Calendar and it might be a good idea at this point to take a quick glance at that. As can be seen on the Course Calendar, after the third week I am asking you to read ahead of the lectures (as indicated in the Chapters to be read column - those are your reading assignments). I will lecture and we will discuss the chapters following the timetable outlined under the column labeled Chapters to be discussed. I am having you read ahead and complete the book early because you will need some of the information contained in the later chapters to complete your team projects that are discussed in the next section. For example, the discussion of leveraged buyouts is found in chapter 16, which we are not going to discuss directly until the 10th week, but you will need to know some about leveraged buyouts much earlier in the course.

Team Projects and Case Studies

Students enrolled in this class will be organized very quickly into five teams of five students each (with some adjustments if enrollments vary from the expected 25). Each team will be assigned three major and two minor class projects, most of them based upon case studies. For all five projects the teams will be giving an oral report to the class as a whole and for five projects each team will also prepare a written report to be presented to the class instructor. Additionally, for the oral reports, each team is expected to have sufficient handouts for the class to help in understanding the oral presentation (considerable guidance will be given by the instructor).

Teams are constructed voluntarily, although the instructor may have to reassign team members to insure that the teams are balanced. Each team will choose a CEO and a name. The CEO will be responsible for coordinating team activities and will act as a liaison between the team and the instructor. It is not necessary for all five team members to speak during each of the five class presentations per team, but the CEO must insure that over the five presentations, each team member must address the class directly at least twice.

Written reports are due one week after oral reports are given. A late penalty is assessed if they are turned in late. All team members are responsible for insuring that work presented is adequate, conforms to the assignment and is submitted on time.

Due dates for the team presentations are listed in the course outline. The major presentations are all in the 2nd half of the class. The designation of team numbers (i.e. who is Team 1, Team 2, etc.) is done by lottery after the teams are chosen and named.

Team Assignments

What follows is a general discussion of the three major and two minor team projects assigned in this class. These assignments will be refined in additional documents that will be given out in class. These additional documents will include very specific formatting guidelines for evaluating the accounting and financial status of the firms we investigate, for example. You will be looking at q-ratios, leverage ratios, current ratios, SIC inter-industry comparisons, and similar statistics. You will also assess strategy and, in the case of historical M&As, evaluate the success of the merger or acquisition.

On the course calendar you will see team reports scheduled for reports entitled Historical M&A and Current M&A. These will be described first.

Historical Merger and Acquisition - Each team will be required to evaluate a major merger or acquisition that has taken place in the last 10 years. (A good example would be the acquisition of Lotus by IBM, or more recently, of McDonnell Douglas by Boeing). It is hoped that at least one team will find a good example of a complete LBO. Students will be required to do background research on the two companies involved prior to the event, including their financial profiles, classify the event (hostile takeover, friendly takeover, tender offer, cash offer, terms, intervention of other firms or bidders, etc.), make an effort to "value" the target firm from data available, assess the strategy of the bidder to the extent that the strategy can be understood, discuss peculiar or unusual features of the bidding or negotiations or the tactics of the event, make a rough evaluation of the impact upon security prices, and generally tell the story of the event. Finally, using some standards of comparison to other M&As and the subsequent history of the merged company, the team will judge the quality of the merger. More specific details will be provided in a lecture.

Current Merger and Acquisition - As the class proceeds, each team will watch the news very carefully for M&A activity that was initiated recently but not yet concluded or initiated as the class is underway. Using guidelines provided in the specific assignment, individual teams will monitor a minimum of three such candidates up until week seven. [This part of the activity is described below as the minor requirement]. It is understood that some teams will probably be monitoring the same companies. In the seventh week (see the course calendar) all five teams will present their primary three candidates each to the entire class, and with the guidance of other members of the class and instructors, each team will finally settle upon the M&A that they want to monitor in detail. Once that decision is made, roughly the same standards of evaluation will be applied as were are required for the historical M&A described above. Strong emphasis will be placed on strategy and valuation. If possible, an effort will be made to blend accounts using the pooling or purchase accounting method described in the book, using information from SEC 10Ks or similar data. More specific details, including some formatting conventions for the report, will be provided when this project is assigned.

Topics Report - The third major report and presentation due is entitled Topics Report. As students read the text they will discover a taxonomy of events, tactics, and strategies associated with M&As, defenses against takeovers, tax strategies, and so forth. For example, the book introduces such esoteric events, structures, or strategies as Dutch Auction buybacks, poison puts for bondholders, poison pills, ESOPS, MLPs (the Boston Celtics is an MLP!), divestitures and reorganizations to improve performance, and so forth. From a list of topics provided by the instructor, each team is required to scout around and find a recent example of at least one of the topics. After approval by the instructor, the team must prepare a report on the topic and the how it was used by the company in question. For example, on January 16, 1998, a company named Corporate Express announced a Dutch Auction self-tender for 35 million shares of their own stock. The Dutch Auction is one of the topics on the list, so an evaluation of this case, which would mostly involve a description of what they did and why they did it satisfies the requirement for the topics report. The list of topics will be provided when this project is assigned. Students may request that certain topics be added to the list, but additional topics must be improved by the instructor.

The written topics reports will be kept by the instructor and added to an archive of topics cases to be used in future classes.

In addition to these three major projects, two lesser projects is also required of each team. These are discussed next.

Preparation for the Current M&A Assignment - As was discussed above in the section on the current M&A assignment, for the first six weeks of the class, each team must monitor at least three ongoing M&As before they finally settle on one for the final analysis. In a fairly informal presentation each team, in the sixth week (see course calendar) must submit the candidate companies for consideration by the class and instructor. Each team will be given about half an hour to make an informal presentation on their best three selections.

Potential Candidates for M&As - This is a fun assignment that, in future years, may be refined into a major assignment for this class. As can be seen in the course calendar, on the final night each team will be asked to present a takeover candidate. In effect, each team will be asked to pretend that they are takeover specialists, like KKR. Using standards that are introduced very early in the semester and that are discussed at length in the text, using somewhat hypothetical scenarios, team members will shop around for companies that might make suitable targets. For example, these might be companies with low q- and leverage ratios, poorly performing stocks, strategic assets, and so forth. Some effort will be made to isolate and justify a bidding price. More details will be provided in class.

Research Sources

It should be understood at the outset that the team projects described above demand very substantial research efforts on the part of all team members, and all of this research will be done outside of the classroom. Generally, the team projects will consist of two components: (1) doing substantial and deep research on the companies in question, and (2) organizing the results into a coherent presentation. This is not a class where one can read a couple of articles in Business Week and present a report.

To begin with, the detailed financial profiles of the companies in question for the major team projects discussed above must be provided for analysis. At a minimum, this will require a review of relevant SEC 10K reports (and 10Qs in some cases) for the companies involved, and much of the data found there will have to be transcribed to spreadsheets to be used for analysis and presentation. (A minimum of two team members must be very familiar with Excel). Certain types of ratio analysis will be undertaken and data from these spreads will be read into, in some cases, spreadsheets formatted for valuation.

Corporate annual reports, press releases, articles discussing reasons and strategy found in the financial press (Wall Street Journal, Fortune, Business Week, etc.), academic articles such as those found in The Harvard Business Review or the numerous articles discussed in the text must be found and summarized to explain strategic reasons for the event in question, the details of the event itself, anomalies, and other elements of the event.

All students in this class will be required to use the internet as a primary research source very frequently. All students will be required to register and build a Yahoo portfolio account on the Yahoo quotes site and to open an account on the SEC's Edgar database site (both accounts are free). All students are also required to be somewhat familiar with Excel. There is also an email mailing list for this class and students must subscribe to that list after the first session. The list name and instructions for subscribing will be provided in the first lecture. Students are expected to retrieve their email at least three or four times a week.

This class has a website at URL http://www2.hmc.edu/e373ca.html (note the "2" in the address line) where a lot of support material for this class will be found. Material will be added to the site throughout the semester. Typically when new material is downloaded to the site you will be informed by email, so it is important that you subscribe to the class list and that you check your email frequently.

A more detailed list of research sources will be provided in class.

Team Selection

The makeup of the teams is voluntary, although I may have to play a small role in the choice to insure that all teams are reasonably balanced. All team members must understand that everyone is expected to share a heavy work load. Each team chooses its own CEO. Your choice for CEO should be a person who is a good organizer and motivator, can lead in the division of labor, and can and is willing to lean on team members who are falling behind in their obligations (and that will happen occasionally). Each team should also have two members who are proficient at Excel (although all team members are expected to be able to use Excel).

Each team will be delivering three formal reports. There is no need for all five members to speak on each report (typically two or three will talk - the presentations last about half an hour), but over the course of the three reports each team member must be part of the oral presentation at least twice. In other words, everyone will be speaking to the class at least twice this semester.

Each of the three formal reports must also be written up (I will provide the format instructions separately in class). The typical write-up will be between 8 and 20 pages, not including the spreadsheets. The burden of the work for the writing should be shared as equitably as possible. Everyone must do some of the writing, and the team members who do the writing should be named in the report. The individual teams can decide how to divide up the writing. All five members can contribute to all three reports (a little cumbersome) or two or three writers can share the burden of each individual report on a rotating basis. There must be at least two writers on each project.

Additionally, although the writing and presentations can be subdivided, all team members must work on all of the team projects. At the beginning of each class, I will allot about 20 to 30 minutes to allow the teams to meet and coordinate their activity. It is the CEO's job to make sure that the team is making sufficient progress on the assigned tasks. Bring your laptop to class if you have one.

The most successful teams will be those who (a) understand the degree of the research commitment being demanded of you, (b) have a reasonable, manageable, and equitable division of labor for sharing this burden, (c) have a CEO who is able to coordinate these activities into a coherent whole. The underperforming team will be penalized by (a) having team members who do not understand or are unwilling to undertake the degree of commitment necessary for the project to do well and (b) therefore putting the burden of the work on other team members, or (c) fail at organization of the material.

Important note: During the oral presentation, your team will be graded, in part, on presentation style, organization, and the extent to which you capture the interest of your classmates. Substance matters most, but presentation style does matter in this class.

Remember this: It is not the instructor's job to make the teams work, it is the instructor's job to judge the teams!

Section on Valuation

Refer to the course calendar and find the assignments for the third, fourth, and fifth week. You will see there that we slow down considerably, taking all three weeks to discuss only two chapters. That is the section of the course on valuation, which is the most difficult part of the course. Don't be terribly concerned about the difficulty of the subject matter in chapters 9 and 10. We are going to try to overcome some of the difficulty by converting some of the valuation formulas to spreadsheets, then apply them to problems. You will start getting those spreadsheets in the third week (this will be some of the material that can be downloaded from the Internet).

Valuation is very important (basically, you are asking, "what is this company worth?") so we have to do our best to master that material.

Some of the models and source material for my lectures on valuation come from the excellent book Valuation - Measuring and Managing the Value of Companies, 2nd ed., by Tom Copeland, Tim Koller, and Jack Murrin (from McKinsey and Company), published by Wiley. If you ever become professionally involved in valuation, this book should be purchased and read, all 550 pages of it.

Homework Assignments

This class relies heavily upon simulations, accounting problems, and computerized projects for learning some of the course content. In a few words, you will learn a lot by doing, rather than listening to my lectures. Some of the homework assignments are detailed and difficult. Although we typically discuss the results of homework assignments in class, I do not grade nor collect the homework. You are simply expected to do it, and to do it on time. Because some of the assignments are difficult, you are encouraged to cooperate with other members of your team on the assignments, and to share and discuss the results. Please realize that to complete the written team reports successfully, you must complete the homework assignments. Some of the assignments are designed to show you how to use automated tools for M&A analysis. Almost all of the homework material will be found at the course assignment web site,

http://www2.hmc.edu/~evans/e373ca.html

This site presently has very little on it, because material is added as we need it in the course. You should get into the habit of checking this site every week.


Examinations and Grades

I will also give you a take-home midterm essay exam and a take-home final for this class. These exams will be based upon your reading and lectures. Their dates are shown on the Course Calendar. The final must be returned to me by the deadline shown or I will be unable to submit a grade for you (generally, all classwork must be completed by the final exam deadline date). I allow the final exam to be faxed to my home office.

Assignments have the following weights in the determination of your course grade.

Midterm:

15%

Final exam:

15%

Presentation of 3 M&A candidates:

Not graded

Verbal team report - Historical M&A:

10%

Written team report - Historical M&A:

15%

Verbal team report - Current M&A:

10%

Written team report - Current M&A:

15%

Verbal team report - Topics report:

10%

Written team report - Topics report:

5%

Verbal team report - M&A candidates:

5%

Individual performance in class participation, in presentations, and in writing will carry some weight in the grading scheme above.

Reaching the Instructor

My office is at Harvey Mudd College and I hold office hours by appointment. On some nights I can also arrange to come a little early if you want to speak to me. The easiest way to reach me is by email. Here are the specs:

Background material:

http://www2.hmc.edu/~evans

email:

evans@hmc.edu

FAX/Voice Mail:

(909) 899-1010

Office:

Parsons 261
Harvey Mudd College

Mailing address:

Department of Humanities and Social Sciences
Harvey Mudd College
301 E. 12th St.
Claremont, CA 91711


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