FIN750 Class Web Page, Summer '18
Instructor: Maggie Foley
Term project: Analyze an M&A case, such as Amazon Whole Foods deal, group project, due with final
· Collect data from companies’ SEC filings
· Use Excel templates of WSP as guideline to work out the accretion / dilution tables
Final grade break down
30% term project (based on Wall Street Prep and SEC filings)
25% Two Harvard Business Cases
0% Questions from academic papers
20% Final Exam (take home exam)
SCHEDULE, LINKS, FILES and Questions
Coverage, HW, Supplements
Class discussion Questions and Documents---
Based on Amazon Whole Foods Deal
Pre-class assignments: Read Harvard Business Study of CSX and answer the questions before the class starts
Case Documents here (used for this class only; excel sheet is in blackboard under course documents)
Assignment #1: Case Questions (due on 5/14/2018)
************************ FYI ***********************
Mergers rules of SEC
Mergers are business combination transactions involving the combination of two or more companies into a single entity. Most state laws require that mergers be approved by at least a majority of a company's shareholders if the merger will have a significant impact on either the acquiring or target company.
If the company you've invested in is involved in a merger and is subject to the SEC disclosure rules, you will receive information about the merger in the form of either a proxy statement on Schedule 14A or an information statement on Schedule 14C.
The proxy or information statement will describe the terms of the merger, including what you will receive if the merger proceeds. If you believe the amount you will receive is not fair, check the statement for information on appraisal or dissenter's rights under state law. You must follow the procedures precisely or your rights may be lost.
You can obtain a copy of a company's proxy or information statement by using the SEC's EDGAR database.
Summary of key M&A documents for finding deal terms of public targets
******* Whole Foods SEC Filing********
Whole foods form 8k filed with SEC on 8/23/2017
“As a result of the Merger, each share of common stock……was converted into the right to receive $42.00 in cash, without interest (the “Merger Consideration”).”
Whole foods is providing materials for the upcoming shareholder voting.
Has law suit documents
Notifying shareholders for upcoming special shareholder meeting
********* Amazon SEC filing *********
Amazon Form 8k with SEC on 6/15/2017
Financing of the Merger
The Company expects to finance the Merger with debt financing ……
Amazon Whole Foods Merger Agreement on 6/15/2017
For the term project, if you work on this M&A case, you should be able to find most of the information in this agreement.
********** Miscellaneous **********
7 potential bidders, a call to Amazon, and an ultimatum: How the Whole Foods deal went down (from business insider.com)
********** SDC Amazon Whole Foods Deal Record (For this class only)*****
Tear Sheet (SDC) (on blackboard)
First Week Part I
Part I: M&A environment and M&A process
~ M&A environment: ~
· Chapter 1 PPT: Introduction
1. What is hubris? What is winners’ curse?
2. Why are there fewer M&A deals during recession period?
3. Any agency problems in M&A?
4. Any tax concern in M&A?
5. What is friendly takeover? Name a few cases.
6. What is Tender offer? Name a few cases Tender offer explanation here (word file)
7. What is hostile takeover? Name a few cases Top five hostile takeover cases (word file)
8. What are the roles of investment banks in M&A?
9. What is proxy contest? Are they costly? Are they efficient? Who act as activist shareholders in the proxy contest?
10. Between target shareholders and acquiring firms’ shareholders, who are better off in general?
11. Acquirers’ stock prices generally fall on the announcement date of the M&A deal. Why?
12. Bondholders win or lose from the M&A transaction? Other stakeholders?
13. Do you have any questions?
· Chapter 2 PPT: Regulatory environment
1. Name the regulations related to M&A
2. SOX: How does it affect M&A? SOX Impact on M&A (KPMG) (word file)
3. Dodd Frank act: How does it affect M&A Dodd Frank Act Impact on M&A (BOA)
4. What about the anti-trust laws on the state level?
5. Do you have any questions?
· Chapter 3 PPT: Common takeover tactics defense
1. Name a few antitakeover measures
2. Do you think that a firm with more antitakeover measures is financially healthier or not? Or it is a bad sign?
3. What is green mail? What is anti-green mail?
4. What is going private?
5. What is E-index? What is G-index? How are they constructed? Are they useful?
· E-Index, corporate governance data, courtesy of Professor Bebchuk
E-index = staggered board + limits to shareholder bylaw amendments + supermajority requirement for mergers + supermajority requirement for charter amendments + poison pill + golden parachutes
· G-index, corporate governance data, courtesy of Professor Metrick. G-Index, has all six items incorporated in E-index, plus 21 more corporate governance mechanisms, ranging from 0 to 26.
6. What about Whole foods? Strong corporate governance? Or because it has a weak corporate governance structure, it was taken over? CEO’s fault? Or it is simply market power?
7. Do you have any questions?
~ M&A process: ~ Skip, and LET’S USE WHOLFOODS and CONTRAIL CASES TO UNDERSTAND THE PROCRESS
· Chapter 4 PPT: Developing business acquisition plans
· Do you have any question?
· Chapter 5 PPT: Implementation search
· Only one question. To both buyers and sellers, what forms have to be filed with SEC for M&A?
· Do you have any question?
· Chapter 6 PPT: Integration
· Do you have any question?
· Assignment #2. First Homework (due before June class starts)
· Assignment #3. Term Project Part I: Pick a M&A case from 15 best M&A cases in 2017 (https://www.nasdaq.com/article/15-of-the-best-mergers-acquisitions-of-2017-cm898464), and report the following: \
The first part of this project (due before June class starts)
1. Identify the 10Q of the two firms to be analyzed, and carry out a ratio analysis to determine the financial status of both firms.
2. Retrieve the values for the stock prices for both firms and calculate the monthly stock returns over the past five years. Analyze the stock performance of both firms.
3. Study the management teams, board structure, ownership composition, and anti-takeover measures such as a staggered board. In your opinion, will you say the two firms have the capacity to resist a hostile takeover attempt?
4. Considering the analysis above, do you observe signs of weakness in the target firm that can expose it to being bought out in the future?
5. Identify the filings with SEC regarding the M&A deal.
6. What have been done on the buy side before the merger agreement is signed?
7. What have been done on the sell-side before the merger agreement is signed?
8. Are any of the companies battling ongoing lawsuits before and after the merger?
You may refer to the following website for information.
· Federal Trade Commission: Bureau of Competition. http://www.ftc.gov/about-ftc/bureaus-offices/bureau-competitionThe FTC’s antitrust de partment is primarily aimed at preventing the business practices that limit competition, such as monopolistic practices, attempts to implement restraint of trade, attempts to monopolize the markets, disruption of mergers and competitions that could potentially hinder competition.
Statistics on Mergers & Acquisitions (M&A). Courtesy of the Institute of Mergers, Acquisitions, and Alliances.
U.S. Department of Justice: Antitrust Division. A source of digitized
documents related to the enforcement of antitrust laws, such as policies,
guidelines, case filings, speeches, testimony, and press releases.
A Plain English Guide to Antitrust Laws. Full text of Promoting
Competition, Protecting Consumers booklet from the U.S. Federal
Trade Commission (FTC). Visit the FTC to view the guidelines for mergers
and acquisitions, business guidance, etc.
9. Are there any tax benefits to the acquiring firm from the acquisition?
10. Write a synopsis of the merger and acquisition case.
This part is due before June class starts.
For class discussion:
· Why do CEOs want to acquire other firms?
· Who make decisions for the M&A deal on the buy side?
· Who make decisions for the M&A on the sell side?
· What else can the target firm do, instead of giving up the firm?
· Sure, the CEO of whole foods kept his job. But for how long? Can he be removed? Is he still powerful?
· Hedge funds’ goals are generally short sighted. And they are active players in the M&A market. So?
· Why did Amazon choose Whole Foods?
· Did whole foods shareholders and management like to be acquired by Amazon?
Any legal issues incurred during the acquisition?
· Amazon shareholders like the idea to acquire whole foods?’
· What is the next big target of Amazon?
· Do you agree with Amazon’s strategy to maintain low tax liabilities but hold tons of cash for growth purposes? (Their way is not traditional at all)
First Week Part II
Part II: Merger & Acquisition Valuation & Modeling
1. The Ke equation has a new term called FSP. What is it? Do we need to add it to Ke?
2. What is unlevered beta? What is levered beta?
3. What is FCF? What is DCF?
4. What are the general procedures to figure out firm value?
5. In terms of M&A, how can we set up DCF? (Let’s try the minicase to learn. The Calculator can quickly get the firm value)
6. Do you have any questions?
1. What are the multiples generally used?
2. What is real option in corporate finance?
3. Do you have any questions?
· Assignment #4: Second Homework (Due before June class starts, updated)
Harvard Business Case Study:
· Option 1: Herz Case Document (used for this class only; excel sheet is in blackboard under course documents)
Assignment #5: Option 1 - Case Questions (Due before next class in June)
· Option 2:Whole foods and Jana partners (handout distributed in class)
Assignment #5: Option 2 - Case questions
Case study questions:
1. Why did JANA partners choose Whole Foods as a target back in April, 2017?
2. JANA partners filed 13D with SEC as a block holder and launched a proxy contest for board seats. Whole foods compromised over and over but still could not reach an agreement with JANA partners. What went wrong? Is the CEO of whole foods a weak leader? Is the corporate governance structure of whole foods too weak? Or is it because the CEO did not have sufficient shares, so he lost control of the firm? What do you think?
3. JANA partners walked away with $300 millions in two months. Do you think that the activist shareholders like JANA partners are helping the market to become more efficient or just the opposite?
The Nonconstant Growth Firm Value Calculator can be used to find the value of a Nonconstant or Supernormal Growth of FCF.
Second Week Part I and II
Part III: Deal Structuring and Financing
· Summary of DCF approached (refer to the handout)
· Let’s revisit the merger excel example using DCF method
Ø What are the potential sources of value from the combination? Does the acquirer have particular skills or capabilities that can be used to enhance the value of the target firm? Does the target have critical technology or other strengths that can bring value to the acquirer? (refer to the handout)
Ø What is the proper discount rate to use? (refer to the handout)
Ø After determining the enterprise value, how is the value of the equity computed? (refer to the handout)
Ø How does one incorporate the value of synergies in a DCF analysis? (refer to the handout)
· End of chapter exercise solution (FYI)
· True / false (self check)
· How to use DCF to assess an M&A deal like Amazon acquiring Whole Foods?
· What is pro forma financial statement?
· What is enterprise value? How to calculate enterprise value? (refer to the handout)
EV = market value of common stock + market value of
preferred equity + market value of debt + minority interest - cash and
· Assignment 6 - Homework of chapter 11 (due by 6/24)
· True and False Qs – self-check
· End of Chapter Exercises solutions FYI
For class discussion Suggested answers to the following discussion questions FYI
1. What is deal structure?
2. When to use cash as the form of payment?
3. When to use stock as the form of payment?
4. Sellers often demand acquirer shares as the primary form of payment. Why?
5. Seller shareholders do not want debt as the form of payment. Why
6. When do shareholders prefer a combination of cash and stock?
7. Why do sellers accept buyer’s overvalued stocks as payment?
8. What is fixed share exchange rate? What is fixed value (floating rate) agreement?
9. What is an asset purchase?
10. What is a stock purchase?
11. Amazon acquiring whole foods is an example of direct merger. Describe what is a direct merger?
12. Direct merger requires shareholders approval?
13. Read Table 11.5 on page 415: advantages and disadvantages of alternative forms of acquisition
14. What is asset purchase? Advantage and disadvantage from the perspectives of both seller and buyer.
15. What is cash for assets acquisition?
16. What is stock for assets acquisition?
17. What is stock purchase? Advantage and disadvantage from the perspectives of both seller and buyer?
18. What is tender offer?
· Assignment 7 – Homework of chapter 12 (due by 6/24)
· True and false Qs – self-check
· End of chapter solutions FYI
For discussion: Suggested answers to the following questions FYI
1. When a merge is taxable?
2. Why paying cash for target assets is taxable?
3. Why paying cash for target stocks is taxable?
4. When does a transaction become tax free?
5. Examples of tax savings in a merger transaction.
6. What is tax inversion?
7. What is good will?
8. How is good will calculated in a merger transaction?
Chapter 13 financing the deal ppt (LBO, not required anymore, but key information is è)
· Assignment 8 - Homework of chapter 14 (due by 6/24)
· True and False Qs – self-check
· Asset sale vs. stock sale: differences from the accounting perspective? Tax perspective?
· Solutions to end of chapter questions (FYI)
For discussion: Suggested answers
1. What is process setting up M&A model?
2. Second step is to estimate stand alone value. What is that?
3. How to determine the offer price?
4. What is a merger transaction?
5. What is a stock purchase?
6. What is deal term?
7. Synergy examples
8. Examples of “negative synergy”
9. After completing the model, you also need to check credit ratio. How?
10. What is share exchange ratio (SER)?
11. Total target shares include marketable target shares outstanding and what else?
12. What is the definition of “fully diluted shares outstanding”?
13. How much is the transaction cost?
************ Wall Street Prep Classes (self-paced course) **********
· 1Introduction 00:56
· 2The Role of the Banker in M&A 06:34
· 3Buy Side Process 04:44
· 4Sell Side Process 07:12
· 5Sample Pitchbooks, Fairness Opinions and OMs 01:01
· 6The Current M&A Environment 12:28
· 7Overview 05:39
· 8Simple Accretion/Dilution Exercise 09:13
· 9Income Statement Adjustments in M&A 11:56
· 10Intermediate Accretion/Dilution Cocktail Exercise 22:25
· 11M&A Accounting Overview 11:12
· 12Assets sales/338 Election vs. Stock Sales & DTA/DTLs 12:58
· 13Deferred Tax Exercise 11:53
· 14Rule of Thumb for DTLs 01:35
· 15Pre-Deal DTAs, DTLs, NOLs and Summary 08:43
· 16What do buyers and sellers care about most? 05:58
· 17Apple Acquires Disney - General Assumptions 10:08
· 18Diluted Shares 18:34
· 19Deal Assumptions 19:04
· 20Financing Assumptions 13:36
· 21Sources & Uses of Funds 06:27
· 22Balance Sheet Historicals 07:33
· 23PPA, Goodwill & Write-Ups 21:03
· 24Modeling Pro Forma Adjustments 15:22
· 25Credit Statistics 09:49
· 26Accretion/Dilution Analysis 22:53
· 31Conceptually Understanding Contribution Analysis 06:49
· 32Modifying the Calendarization Schedule 01:59
· 33Modeling the Contribution Analysis 16:16
· 34Fixed vs. Floating Exchange Ratios, Part 1 07:43
· 35Fixed vs. Floating Exchange Ratios, Part 2 03:21
· 36Fixed vs. Floating Exchange Ratios, Part 3 07:40
Assignment #9: Term project part II (Due by 6/24):
· Use WSP (chapter 4, clips 17-26, total of 143 minutes) as guideline
· File 1 as template or reference
Apple Disney accretion / dilution example excel done; (copy right by WSP)
· File 2: The accretion / dilution excel sheet empty (copy right by WSP).
Fill up blanks in the above table to complete the term project.
· If you need to make assumptions, please clarify.
· Due before the end of the semester
********** Survey Papers (FYI)********
· Extra credits opportunities to earn 10 extra points (NOT ASSIGNMENT 10, due by 6/24):
· Option 2: Read the above three survey papers and come up with a research topic in M&A. Write a research proposal by briefly discussing why your research topic is important, what is your hypothesis, and where you plan to collect the data. Skip the methodology part. About 5 pages long, font size 12 Times New Roman, double space, ADA citation style .
Summary of Financial Data Primary Sources (chapter 9)
Primary SEC Filings in M&A Transactions—U.S. Issuers (chapter 9)
****************** LBO ******************
Characteristics of a Strong LBO Candidate
□ Strong Cash Flow Generation
□ Leading and Defensible Market Positions
□ Growth Opportunities
□ Efficiency Enhancement Opportunities
□ Low Capex Requirements
□ Strong Asset Base
□ Proven Management Team
General Ranking of Financing Sources in an LBO Capital Structure
LBO Analysis Steps
Step I. Locate and Analyze the Necessary Information Step II. Build the Pre-LBO Model
a. Build Historical and Projected Income Statement through EBIT
b. Input Opening Balance Sheet and Project Balance Sheet Items
c. Build Cash Flow Statement through Investing Activities
Step III. Input Transaction Structure
a. Enter Purchase Price Assumptions
b. Enter Financing Structure into Sources and Uses
c. Link Sources and Uses to Balance Sheet Adjustments Columns
Step IV. Complete the Post-LBO Model
a. Build Debt Schedule
b. Complete Pro Forma Income Statement from EBIT to Net Income
c. Complete Pro Forma Balance Sheet
d. Complete Pro Forma Cash Flow Statement
Step V. Perform LBO Analysis
a. Analyze Financing Structure
b. Perform Returns Analysis
c. Determine Valuation
d. Create Transaction Summary Page
· Final Exam (Take home exam, 50 multiple choice questions covering chapters 9, 11, 12, 14, will be posted on blackboard @12am on 6/4, due @12am on 6/8)
· All of the 9 assignments are due by the end of the semester, not with the final
· Term Project might be hard. Be patient. I will work with you in June to get this the Accretion / Dilution WSP analysis done
Useful Mergers and Acquisitions Web Sites
Federal Trade Commission:
Bureau of Competition. The FTC's antitrust arm seeks to prevent
business practices that restrain competition -- including monopolistic
practices, attempts to monopolize, conspiracies in restraint of trade, and
anticompetitive mergers and acquisitions.
Statistics on Mergers
& Acquisitions (M&A). Courtesy of the Institute of
Mergers, Acquisitions and Alliances.
U.S. Department of Justice: Antitrust Division.
Provides access to electronic documents related to the enforcement of
antitrust laws, including policies, guidelines, case filings, speeches,
testimony, and press releases.
Overseas Private Investors Corporation (OPIC).
OPIC is an independent U.S. Government agency that assists U.S. companies in
some 140 emerging economies.
A Plain English Guide to Antitrust Laws.
Full text of Promoting Competition, Protecting Consumers booklet
from the U.S. Federal Trade Commission (FTC). Visit the FTC for
mergers and acquisitions guidelines, business guidance, and more.
Other misc information FYI and maybe for future:
· E-Index, corporate governance data, courtesy of Professor Bebchuk
· G-index, corporate governance data, courtesy of Professor Metrick
· http://www.whartonwrds.com/wp-content/uploads/2016/09/Thomson-Reuters-TR-version-of-SDC-MA.pdf SDC M&A database on WRDS, the major website for M&A studies
· Books highly recommended
Microeconometrics using Stata by Cameron &Trivedi
Microeconometrics: Methods and applications, by Cameron & Trivedi
· Potential research topics:
1) Impact of tax reform on M&A deals
2) Is recession a bad period for M&A to the acquirers?
3) Sure. Stockholders from both sides are wealthier after M&A. But who might suffer from the M&A? Are mergers and acquisitions always good to our economy?
4) Acquirers sometimes use cash (debt) to pay for the acquisition. Bondholders are worse off because firms are riskier with more debt. However, bondholders have no voting rights. So how does the bond market react to the merger and acquisition news in general? At the announcement date? At the agreement signed date? Post merger?