BAFI507: Mergers & Acquisitions

Course Outline

COURSE GOALS
To provide a general understanding of M&A processes, their causes, including
economic and agency motivations, and their consequences
To familiarize students with valuation techniques and transaction structuring
To illustrate tactics for friendly M&A negotiations and hostile transactions
To promote students attention to due diligence, risk management, and execution as
important causes of M&A failure and success

LEARNING OBJECTIVES
By the end of this class, the students will be able to:
Identify motives for transactions !
Apply different valuation techniques in M&A settings and know !when and where to
apply them !
Recommend and justify a method of payment and financing packages for a deal !
Understand tactics for friendly negotiations and hostile transactions !
Understand the role of legal environment and good corporate governance !
Propose a plausible M&A transaction including motivation, valuation, structuring, and
integration !

ASSESSMENT SUMMARY
Case Studies 30%
Short Paper 30%
Pitch Book 30%
Participation 10%

COURSE INFORMATION
Division: Finance Term/period: Spring 2017
Instructor: prof. Lena Pikulina Teaching Assistant: TBA
Email: elena.pikulina@sauder.ubc.ca Email: TBA
Phone: 604 822 3314 Phone: TBA
Office hours: Wed, 5:00 p.m. - 6:00 p.m. Office hours: TBA
Section number: 001 Class times: Mon-Wed, 2.00 p.m. 4.00 p.m.
Course duration: March 1-April 30 Classroom location: HA 133
Course website: http://connect.ubc.ca/

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BAFI507: Mergers & Acquisitions

Course Outline
BRIEF COURSE DESCRIPTION
Mergers and acquisitions (M&As) can be critical to the success of corporations and their
managers. Our study of change of control will include the economic motivations for M&A
activity, advanced valuation, transaction structuring, creative financing, risk management,
tactics for friendly M&A negotiations and hostile transactions, due diligence, and execution.
The course is balanced between lecture, cases, and student presentations. Active participation
is essential. The course is useful for students pursuing careers in corporate finance, investment
banking, commercial banking, and business consulting.

COURSE MATERIALS & REQUIREMENTS

Reading Materials: Two useful background books on M&A are:
P. A. Gaughan, Mergers, Acquisitions, & Corporate Restructurings (recommended)
R. F. Bruner, Applied Mergers and Acquisitions

A good corporate finance textbook such as Fundamentals of Corporate Finance by Brealey,

Myers, and Allen or Corporate Finance by Ross, Westerfield, Jaffe, and Roberts will be
helpful but not necessary.

Other useful books:

S. M. Bragg, Mergers & Acquisitions: A Condensed Practitioners Guide
A. J. Sherman, Mergers & Acquisitions from A to Z
T. Koller, M. Goedhart, D. Wessels, Valuation: Measuring and Managing the Value of
Companies

Technology Requirements: a laptop with MS office or equivalent

Activity Fees: access to Harvard cases
Useful Links (Other):
Recent deals: reuters.com/finance/deals/
WSJ deal blog: blogs.wsj.com/deals/
HBR on M&As: hbr.org/topic/mergers-and-acquisitions

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BAFI507: Mergers & Acquisitions

Course Outline

ASSESSMENT

I. Cases
Cases bring realistic and contextually rich situations into the classroom and allow students to
appreciate the beauty and complexity of M&A processes. They provide a detailed background
to identify key features of all M&As and crucial details of a particular deal. They help in
developing a structured approach to M&A and getting into the habit of creating a full picture
of a deal via filling in information gaps (via inside and outside research).
There are four cases in the course. I will lead the first case discussion (Ducati). All the student
groups will write a memorandum for the other three cases and each group will present one
case in class. Please, form groups asap and subscribe at BAFI507FT2017.ca for your choice(s) of
case to be presented in class. The cases are allocated on the first-come, first-served basis.
Students should work in the same group of five or fewer for all group-based assignments.
A case memo should be 3 pages of text maximum, 1.5 spacing, 12pt and 1-inch margins
(roughly), plus any necessary appendices. A few tips on writing a good memo:
Focus on the question at hand; dont just repeat the facts listed in the case.
Make sure your arguments, figures, and tables directly address the issue.
Focus on impact and interest, not quantity. In essence, a memo is not an essay, so tables and
bullet points are welcome.
Make sure that all your attachments are really necessary and add value; eliminate those that do
not clearly make the cut.
Every group (including presenters) should electronically submit a case memo to
elena.pikulina@sauder.ubc.ca before the beginning of the class when the case is discussed.
In class, the case discussions will start with a Power Point presentation by the lead group(s),
followed by open/structured discussion. If there is more than one group working on a case
then a variety of styles for coordinating the presentations are possible:
1. Leader / Follower: One group leads off the presentation (20 minutes) while the second
group focuses on follow up and response. The first group can focus on presenting their
analysis, while the second group can analyze which points are shared in common and
which there is disagreement on, which should present opportunities for class discussion.
Please note that this setup is not intended to be adversarial, and the focus should be
primarily on illuminating the relevant issues, rather than devolving into an argument
over who is right. This requires tact in putting forward ones own view while allowing
thoughtful consideration of other perspectives.
2. Symmetric / joint presentation: The two groups essentially choose to merge their
presentations, while still making an effort to point out where they share common
ground and where the analysis in their memorandum differed.
3. Role play: The two groups decide to take on different roles (e.g., target vs. acquirer) in
order to more effectively present the case to the class.
All the cases can be purchased from the Harvard Business Publishing online via course pack
at: http://cb.hbsp.harvard.edu/cbmp/access/40807076. Please register with the Harvard
Business Publishing before purchase. Alternatively, you can buy individual cases online
yourself by searching case name and matching case ID.

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BAFI507: Mergers & Acquisitions

Course Outline
II. 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 of five or fewer for all group-based
assignments, and take the point of view of an M&A advisor for either a potential acquirer or
potential seller. The detailed instructions are at the end of this syllabus.
Each group pitch book should be five pages of text maximum, with 1.5 spacing and 12-pt font
and 1-inch margins (roughly) plus any appendices that are necessary. The pitch book is due
electronically to me by Sunday, April 9, 2017.
Outline format for a potential buyer (seller):
1. The strategic situation of your client (buyer/seller), 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.
9. Principal issues in a successful integration of the target/buyer with your clients 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.

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BAFI507: Mergers & Acquisitions

Course Outline
III. Short Paper - Analysis of Supplementary Readings
Students are expected to hand in one short paper (three pages of text maximum) analyzing
supplemental course readings and/or other independent study you have engaged in outside
of class. The supplemental reading list is at the end of this syllabus, and you are also invited to
add other readings of interest that you find on your own. Analysis of recent events is most
welcome. Once you identify a topic of, you should choose a reasonable set of readings to base
your writing assignment on. The short paper is due electronically to me at
elena.pikulina@sauder.ubc.ca on Sunday, April 16, 2017.
High quality contributions will have an analytical focus. That is, rather than just summarize
what you have read, you should try to relate it to ideas we have discussed in class, during
lectures or cases; discuss how it reinforces or calls into question theoretical foundations;
discuss how it reinforces or calls into question common practice; discuss how it relates to
empirical facts, recent deals you have read about, etc. Please provide a list of references at the
end of the writing assignment.
A good place to start on this would be to read a few of the supplementary readings, and for a
topic that interests you do further research until you come up with 3-5 solid references around
the topic. Think about how what you have learned relates to ideas we have talked about in
class, and to current events, and bring these ideas into your paper. By reading the paper, I
should get a sense of how you have extended your knowledge of a topic related to our class
through your outside research, and I should see evidence that you are able to apply these ideas
to events occurring in the real world.

IV. Participation
Your comments in class are important. It helps if I know your name. Please use name cards,
or allow me to ask your name when you contribute. I try to adjust for peoples personalities.
For those who are more reserved, I appreciate very much when you make an effort to express
your thoughts. For those who are more outspoken, I am most impressed when you can find
ways to draw your classmates into a discussion.

Important Deadlines
Hertz case is due on Wednesday, March 22, before the class
Shenzhen case is due on Wednesday, March 29, before the class
Roche case is due on Wednesday, April 5, before the class
Pitch book is due on Sunday, April 9
Short paper is due on Sunday, April 16

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BAFI507: Mergers & Acquisitions

Course Outline

SCHEDULE
WEEK 1:
Intro: Course Outline and Objectives
M&As in Perspective and Theoretical Frameworks
To do:
Form groups, decide on case preferences
WEEK 2:
M&A Valuation: DCF & Multiples
Case: Ducati & Texas Pacific Group
To do: Read the Ducati case and think about the following questions.
1) First of all, lets understand the environment because no deal is done in vacuum.
Understanding the business environment is the key to answering all the other
questions. Note: Well start analysis of all our cases with this question and its sub-
questions. Try to make your answers here as forward-looking as possible. For
example, if you mention any recent trends or changes, try to assess whether these
trends will continue in the future and what these changes will mean for companies
in question.
a. Where and when? What are the relevant country conditions? What are the
relevant market conditions?
b. Who? Who are the main deal participants? Companies, groups, individuals,
politicians, etc. What are their interests? What are the challenges they are
facing?
c. What? What is the essence of the opportunity? Industry vs. company
opportunity? What are the main sources of value? What are the alternatives, if
this opportunity is missed?
2) Is TPG a financial buyer or a strategic buyer?
3) What are the key risks of the deal? How are they mitigated by the proposed deal
structure?
4) To value the 51% of Ducati that TPG is contemplating acquiring, outline the main
steps you need to take. It is optional to actually complete the valuation. More
importantly, describe:
i) What method is the most suitable for valuation? APV vs. WACC
ii) What data you would need to complete each step?
iii) What data in the case is available that is needed (referring to Exhibits/pages)
5) How much should TPG be willing to bid?

WEEK 3:
Guest lecture
Case: Bidding for Hertz
To do: Read the Hertz case and prepare your answers to the following questions.
1) Where and when? Who? What? For more details on this question, see question #1
for the Ducati case.
2) How does the dual-track process used by Ford to initiate consideration of strategic

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BAFI507: Mergers & Acquisitions

Course Outline
alternatives affect the bidding process for Hertz?
3) In what ways does Hertz conform or not conform to the definition of an ideal LBO
target? Do you believe Hertz is an appropriate buyout target?
4) What are the value-creating opportunities in this transaction?
5) How realistic are the key assumptions that underlie the Bidding Groups
projections in case Exhibits 8, 9, and 10? Which assumptions are most likely to have
the largest impact on returns?
6) Valuation of Hertz:
a. What is the value of Hertz using the Multiples method of valuation?
b. What is the value of Hertz using the Free Cash Flow to Capital and APV
methods of valuation?
c. Extra: What is the value of Hertz using the Free Cash Flow to Equity
method of valuation? Hint: Debt/Equity ratio is different in different
periods and should be based on market value of equity.
7) Based on the base-case estimates in case Exhibits 8, 9, and 10 and your estimate(s) of
terminal value if the sponsors put up $2.3 billion in equity, what return can they
expect to earn?
8) 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 morein either
case, by how much?
9) What is the market-required rate of return for this investment, and why might this
differ from the sponsors target return?
WEEK 4:
Transaction Structuring & LBOs
Legal framework
Case: Shenzhen Development Bank (SDB):

To do: Read the SDB case and prepare your answers to the following questions.
1) Where and when? Who? What? For more details on this question, see question #1 for
the Ducati case.
2) What are the key risks for investing in SDB? Think of both systematic (market specific)
and idiosyncratic risks (specific for this particular deal) 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?
In particular, what is the premium/discount for market being overheated? For
illiquidity? For control? Hint: DCF valuation technique cannot be applied in this case, so
use the multiples valuation technique.
a) To estimate the premium/discount for market being overheated, compare
market valuation of SDB with median/mean market valuation of comparable
companies. Use trading P/B multiples.

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BAFI507: Mergers & Acquisitions

Course Outline
b) Use median/mean transaction multiples to estimate illiquidity discount. Youll
quickly see that in China companies are frequently sold below market value.
c) The difference between 1.6 and your answer for the previous question should
give you control premium. What is the control premium?
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 Newbridges
turnaround plan post-investment?
WEEK 5:
Hostile Takeovers & Corporate Governance
Case: Roche vs. Genentech
To do: Read the Roche case and prepare your answers to the following questions.
1) Where and when? Who? What? For more details on this question, see question #1 for
the Ducati case.
2) Why is Roche seeking to acquire the 44% of Genentech it does not own? What are the
advantages of owning 100% of Genentech? What are the risks?
3) As a majority shareholder of Genentech, what responsibilities does Roche have to the
minority shareholders?
4) As of June 2008, what is the value of the synergies (per share) Roche anticipates from a
merger with Genentech? To simplify the analysis, use 9% WACC in your calculations.
5) Based on DCF valuation techniques, what range of values is reasonable for Genentech
as a stand-alone company in June 2008? Exclude synergies from your valuation and use
a 9% WACC. Assume that as of the end of June 2008, Genentech held approximately $7
bln in cash, including investments and securities that were not needed in its daily
operations. Hint: Exhibit 10 is a good starting point for this analysis.
6) What does the analysis of comparable companies (Exhibits 12, 13, and 14) indicate
about Genentechs value within the range established in the previous question?
7) What changes in Genentechs valuation assumptions occurred between June 2008 and
January 2009? What changes were due to the financial crisis?
8) Should Franz Humer launch a tender offer for Genentechs shares? What are the risks?
What price should he offer? Should he be prepared to go higher? How much new
financing will Roche need to complete the tender offer?
WEEK 6:
Pitch book presentations
Deadline for short paper

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BAFI507: Mergers & Acquisitions

Course Outline

COURSE AND INSTITUTIONAL POLICIES

Attendance: As per RHL policy on Professionalism, Attendance and Behaviour, students are expected to attend
100% of their scheduled classes. Students missing more than 20% of scheduled classes for reasons other than
illness will be withdrawn from the course. Withdrawals, depending on timing, could result in a W or an F
standing on a students transcript. Students must notify their instructors at the earliest opportunity if they are
expected to miss a class due to illness. A medical note from a licensed, local doctor is required if more than 20% of
scheduled classes for a course are missed due to illness. Students are required to notify the Student Experience
Manager if they are absent from two or more classes due to illness.
Tardiness: As per RHL policy on Professionalism, Attendance and Behaviour, students are expected to arrive for
classes and activities on time and fully prepared. Late arrivals may be refused entry at the discretion of the
instructor or activity lead. Students arriving halfway through a scheduled class, or later, will be treated as absent
for that class.
Electronic Devices: As per RHL policy on Professionalism, Attendance and Behaviour, laptops and other
electronic devices (cellphones, tablets, personal technology, etc.) are not permitted in class unless required by the
instructor for specific in-class activities or exercises. Cellphones and other personal electronic devices must be
turned off during class and placed away from the desktop. Students who fail to abide by the RHL lids down
policy will be asked to leave the room for the remainder of the class. Research has shown that multi-tasking on
laptops in class has negative implications for the learning environment, including reducing student academic
performance and the performance of those sitting around them.

ACADEMIC INTEGRITY
All UBC students are expected to behave as honest and responsible members of an academic community. Failure
to follow appropriate policies, principles, rules and guidelines with respect to academic honesty at UBC may
result in disciplinary action.
It is the students responsibility to review and uphold applicable standards of academic honesty. Instances of
academic misconduct, such as cheating, plagiarism, resubmitting the same assignment, impersonating a
candidate, or falsifying documents, will be strongly dealt with according to UBCs procedures for Academic
Misconduct. In addition to UBCs Academic Misconduct procedures, students are responsible for reviewing and
abiding by RHLs policy on Academic Integrity.
STANDARD REFERENCE STYLE
The Robert H. Lee Graduate School uses American Psychological Association (APA) reference style as a standard.
Please use this style to cite sources in your work unless directed to use a different style.

LATE ASSIGNMENTS
Late submissions will not be accepted and will receive a zero.

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BAFI507: Mergers & Acquisitions

Course Outline
SUPPLEMENTAL READINGS

1) The Company Sale Process, by William E. Fruhan, HBS course website online purchase.
2) Evaluating M&A Deals: Accretion vs. Dilution of Earnings-per-share, by Baldwin, HBS course website
online purchase.
3) A Note on Capital Cash Flow Valuation, by Ruback, HBS course website online purchase.
4) Note on Valuing Equity Cash Flows, by Luehrman, HBS course website online purchase.
5) Note: Valuing a Business Acquisition Opportunity, by Fruhan, HBS course website online purchase.
6) M&A Legal Context: Standards Related to the Sale or Purchase of a Company, by Baldwin, Bagley, and
Quinn, HBS course website online purchase.
7) M&A Legal Context: Hostile Takeovers, by Baldwin, Bagley, and Quinn, HBS course website online
purchase.
8) M&A Legal Context: Basic Framework for Corporate Governance, by Baldwin, Bagley, and Quinn, HBS
course website online purchase.
9) The HBR Interview: Bruce Wasserstein on Giving Great Advice, by Wasserstein, Stewart, and Morse, HBS
course website online purchase.
10) The Fine Art of Friendly Acquisition, by Aiello and Watkins, HBS course website online purchase.
11) Technical Note on Equity-Linked Consideration, Part 1: All-Stock Deals, by Baldwin, HBS course website
online purchase.
12) Technical Note on Equity-Linked Consideration, Part 2: Announcement Effects, by Baldwin, HBS course
website online purchase.
13) Technical Note on Equity-Linked Consideration, Part 3: Cash-and-Stock Deals, by Baldwin, HBS course
website online purchase.
14) Technical Note on Consideration: Floors, Caps, and Collars, by Baldwin, HBS course website online
purchase.
15) Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions, by Rappaport and
Sirower, HBS course website online purchase.
16) A Note on Valuation in Private Equity, by Gompers, HBS course website online purchase.
17) University of Rochester Roundtable on Corporate M&A and Shareholder Value, Journal of Applied
Corporate Finance 17, 2005, 64-84.
18) Managing M&A Risk with Collars, Earn-outs, and CVRs, by Caselli, Gatti, and Visconti, Journal of Applied
Corporate Finance 18, 2006, 91-104.
19) Is There One Best Way to Sell a Company? Auctions Versus Negotiations and Controlled Sales, by Boone
and Mulherin, Journal of Applied Corporate Finance 21, 2009, 2837.
20) Private Equity: Past, Present, and Future: An Interview with Steve Kaplan, Journal of Applied Corporate
Finance 19, 2007, 8-16.
21) Private Equity, Corporate Governance, and the Reinvention, by Wruck, Journal of Applied Corporate
Finance 20, 2008, 8-21.rket
22) Big is Better: Growth and Market Structure in Global Buyouts, by Cornelius, Langelaar, and van Rossum,
Journal of Applied Corporate Finance 19, 2007, 109-116.
23) The Era of Cross-Border M&A: How Current Market Dynamics are Changing the M&A Landscape, by
Zenner, Matthews, Marks, and Mago, Journal of Applied Corporate Finance 20, 2008, 84-98.
24) The Anatomy of an LBO: Leverage, Control and Value, by Damodaran, In CFA Institute Conference
Proceedings Quarterly 25, 2008, 16-28.
25) Note on Leveraged Buyouts, Tuck School of Business at Dartmouth.
26) The Agency Costs of Overvalued Equity and the Current State of Corporate Finance, by Jensen, European
Financial Management 10, 2004, 549-565.
27) Stock-Market Driven Acquisitions, by Shleifer and Vishny, Journal of Financial Economics 70, 2003, 295-311.
28) Do Stock Mergers Create Value for Acquirers? by Savor and Lu, Journal of Finance 64, 2009, 1061-1097.

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