Giddy | CISCO Security "Mergers & Acquisitions" Workshop

Singapore Institute of Management
CISCO Security course on
Mergers & Acquisitions

Prof. Ian Giddy, New York University

A 3-day training course dedicated to the valuation, structuring, financing and negotiating of M&A transactions

Evaluating and pricing acquisitions
Creating shareholder value through rigorous pre-merger analysis
Identifying and assessing different synergies
Negotiating the terms of the deal
Managing post-acquisition integration
Financing and structuring the deal

The Course
This course uses an analytical "corporate finance" framework and real-world applications to introduce the key principles and techniques of successful mergers and acquisitions. 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 acquisitions make sense, and how can they be financed?

One goal for participants is to develop a check list or rapid overview of the key criteria in an acquisition deal, to consider when analyzing a proposal, so as to grasp the main strengths and risks of the strategic and financing alternatives.

Materials
Participants will be provided with a package of materials useful to the structuring and analysis of merger and acquisition transactions, including pertinent articles, rating agency reports and sample documentation from actual deals done in Asia and elsewhere. The workshop will include case studies of actual financings, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of deals through group work and plenary discussions.

Key Issues to be Explored

Learn or update fundamental Corporate Finance knowledge
Identify the value drivers as well as the vulnerabilities of a business
Master methods to calculate the cost of capital
Apply corporate valuation models, including asset-based, comparables and cash flow methods
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 much money is needed for the transaction, including fees and restructuring costs?
What are the key features of due diligence?
How should a merger be negotiated and structured?
What are the key terms and conditions, covenants and pricing, of different sources of acquisition finance, including senior and second lien borrowing, subordinated notes, mezzanine finance, warrants and convertible bonds?
What are the essential features of leveraged acquisitions?

Essential Pre-Course Reading

Outline of Course

Date	Topics	Materials
Day 1	The Five Principles of Corporate Finance Mergers and Acquisitions: the fundamental economics Corporate Finance: the decisions that create shareholder value Investment, financing, payback and risk management The five guidelines for corporate finance Identifying value drivers in a company Valuation methods as investment tools NPV and IRR The risk-return tradeoff diversification the Capital Asset Pricing Model the required return on equity investments Making real investment decisions Case study: Costa Rica Forest Resources Basing investments on cash flows: finding a company's free cash flows Exercise: Free Cash Flows at Actavis Financing Techniques, the Cost of Capital, and Capital Structure Sources of corporate finance The capital structure decision: debt versus equity Cost of capital cost of debt cost of equity weighted-average cost of capital Case study: Life Time Fitness: Find this company's cost of capital Optimal capital structure: how to get there Adjusting the costs of debt and equity for leverage Exercise: Leveraging Life Time. How would the client's beta and cost of funds be affected by a higher level of debt? Ratings and debt pricing Using debt and derivatives to manage financial risks Developing an Acquisition Strategy Identify your competitive advantages Define your acquisition objectives and specific acquisition criteria Case study: ISS 101. How would you define the growth and acquisition strategy at ISS? Selecting advisors -- valuation, negotiation, legal and due diligence, and financing An opportunity arises: is it the right target? What fits our criteria, what doesn't? What aspects of the business should be kept, what sold? Dealing with private owners Dealing with defensive strategies: poison pills and other devices Dealing with rival bidders What will it take after doing the deal to make it all work? Is it a "fixer-upper?" Are shareholders going to like the deal? Why? Developing the negotiation strategy -- what are sellers' motivations and needs?	Presentations cisco_investment_tools.pdf cisco_financing_tools.pdf cisco_strategy Case Studies Taca Lease Costa Rica Forest Rec. Actavis FCF Life Time Fitness ISS 101 Articles Mergers & Acquisitions: An Introduction Time value of money Calculating a Company’s Cost of Capital Fool's Finance 5 Keys to Deal Success Competitive Analysis Glossary of M&A Terms Spreadsheets tvm.xls tacalease.xls forestry.xls actavis_fcf.xls lifetime_wacc.xls
Day 2	Valuation in Mergers and Acquisitions: Tools and Applications Valuation for acquisitions Asset-based and balance-sheet approaches Market value approaches Multiples and comparables Enterprise value and EBITDA Dividend- and cashflow-discount models Establishing required rates of return Free cash flows to firm Case study: Valuing Actavis.. Using two different appraoches, we value a company. Restructuring checklist Total cost computation Valuing the synergies Operating synergy analysis Financial restructuring analysis Break-up valuation Case study: MTC-Celtel. Teams 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. Sensitivity analysis Case study: Active Generation. Participants value a private company for acquisition, using both comparables and cash flow methods and incorporating the results of potential synergies Negotiating the Merger Structuring the deal: How much should we pay? How should we pay? The proposed basic Term Sheet The legal structure Keep the romance alive during due diligence and while you secure financing Closing the deal Case study: Lifetime-Active Generation. Participants engage in a hands-on negotiating exercise including valuation, setting the price and payment terms of the merger, and negotiating control Assessment and Due Diligence 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 follow the sequence of events in this cross-border merger and develop a due diligence checklist. Tailoring due diligence to the company and industry	Presentations cisco_valuation.pdf cisco_negotiation.pdf Case Studies Valuing Actavis Active Generation MTC-Celtel Allied Colloids: Episode 1 Allied Colloids: Episode 2 Articles and Documents Methods of Valuing a Business Sample Letter of Intent Sample Confidentiality Agreement Sample Purchase Agreement Types of Mergers and Acquisitions Sample Due Diligence Checklist Spreadsheets actavis_ev.xls actavis_valuation.xls FCFFvaluation.xls active_generation_valuation.xls mtc-celtel.xls
Day 3	Financing Acquisitions Finding the optimal capital structure: debt, equity or mezzanine? Capital structure considerations Case study: Photronics. Financing the Singapore acquisition at a technology company Raising the acquisition financing Asset-based finance Bridge financing Mezzanine debt Debt with warrants High-yield bonds Subordinated seller notes Private equity sources Refinancing strategies Case study: Madras Appliances. Teams evaluate a variety of creative financing techniques in the context of this challenging acquisition situation. Raising the Money: Debt Capacity Analysis Focus: synthetic ratings and debt pricing Case Study: Nukem Security Services. A management team hopes to acquire the company's security services division. How much of the purchase cost could be financed with debt? Paydown and exit analysis Post-Merger Integration Major factors determining success of post-merger integration Checklist of areas of risk Compensation and motivation issues Setting milestones Divestitures Case study: The Merger of Penn State and Geisinger. Participants discuss pitfalls and alternative approaches to post-merger integration success. They prepare an action plan for the effective integration of two companies. Group Exercise Case Study: Flexics. Participants employ the tools and ideas of the course to a competitive situation featuring a leveraged acquisition proposal. They negotiate key features, including: Valuation of the target Raising the funding Summary "term sheet" agreement Post-merger integration plan Summary and Conclusions	Presentations cisco_financing.pdf cisco_integration.pdf Case Studies Financing Acquisitions at Photronics Madras Appliances Penn State and Geisinger: Post-Merger Integration Flexics: Selling the Company Articles Syndicated Loans Seller Paper Mezzanine Debt 1 and 2 Analysis of a Merger Failure Spreadsheets dubrovnik_eyewear.xls madras_appliances.xls ratings.xls lbocapacity.xls flexics.xls

Additional Resources
Books
Damodaran on Valuation (Aswath Damodaran)
Mergers, Acquisitions and Corporate Restructuring (dePamphilis)

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

Useful Links
dealbook (M&A and private equity deals)
biz.yahoo.com (summary data and financials)
reuters.com (summary financials)
investinginbonds.com (treasury rates, corporate bond prices and ratings)
fitchratings.com (bond ratings)
bondsonline.com (corporate bond spreads)
damodaran.com (industry ratios)
advfn.com (corporate financial ratios)

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 acquisition and 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.