EXECUTIVE MBA

MERGERS & ACQUISITIONS

Associate Professor David Trende

June - July 2016

2

Course Overview

Mergers and acquisitions (M&A) is part of a much wider topic that might best be described as business restructuring. Restructuring involves major change in the way a business is organized and operated. This can range from the restructuring necessary to rescue businesses from bankruptcy through management buyouts, leveraged buyouts, spin-offs, carve-outs, etc. to undertaking major acquisitions of other businesses, in order to achieve rapid growth in size and profitability. Such restructurings require a wide range of business skills including “strategic and operations management; project administration; organizational dynamics; accounting; economics; finance; business, tax and securities law; and negotiation”1. In short, all the skills you have learnt in your core studies, and more. It is this breadth that makes the study of restructuring exciting. However, we must recognize that it is impossible to deal with all types of restructuring in a single course. For that reason we will concentrate on M&A. Merger & acquisition activity is a mainstay of the growth characteristics of large firms. It has been a feature of business life for well over a century. Whilst there have been many merger ’waves’ over the years, this pathway to growth has constantly maintained its importance. This subject briefly touches on the history of, and reasons for, merger & acquisition activity providing a rationale for the study of many of the following elements of the process of merger & acquisitions:

the context of mergers & acquisitions

the constraints and opportunities arising from regulatory considerations

the way in which evaluation of takeover targets be undertaken

the nature and use of term sheets as a useful tool in M&A transactions

valuation and the identification of synergies in acquisitions

the legal and operational due diligence processes

financing considerations in acquisition transactions

the importance of post-deal integration We will use a number of Australian based cases to illustrate the concepts and principles underlying M&A practice for many of the topics we will study during the course. A set of materials is available on Thread and you should make yourself familiar with the cases before the course commences. A great deal of material is provided and it is not intended that you digest every single word of it; you should be using the class powerpoints and readings to seek an understanding of what is driving the outcome of the cases. We will have a number of guests join us in class during the term to present portions of the course content. These guests are active practitioners in the M&A space and bring a wealth of experience and expertise to the classroom. When this is allied to the cumulative experiences of the class members we have a very powerful skill set at our disposal.

1 p XV of the Preface in Donald De Pamphilis, Mergers, Acquisitions, and other Restructuring Activities, Academic Press, 2001.

3

Objectives of the Subject

This subject is for people who see active involvement in mergers & acquisitions as part of their future management career. At the end of this subject you should:

Understand the reasons behind the continuing levels of M&A activity.

Appreciate the impact of regulatory considerations on M&A deals.

Understand the interactive elements that make up successful mergers and acquisitions.

Gain a working knowledge of how to go about managing a merger or acquisition.

Topics

The following is the list of topics that will be covered in class. We are joined by numerous M&A practitioners to present on their areas of expertise during the module. It should be noted that our guests’ other commitments may affect their availability and occasional changes may be needed. Thursday 9 June 10.00 - 11.30 Introduction: an overview of the M&A landscape; the four fundamentals 1.00 - 2.30 The regulatory environment & deal structuring 7.00 - 8.30 Strategy & the Search for Targets Saturday 11 June 8.00 - 9.30 Identifying and valuing synergies 10.00 - 11.30 The nature and use of terms sheets 1.00 - 2.30 Due diligence: Japan Post acquisition of Toll Holdings 3.00 - 4.30 Valuation in M&A – Introduction and Price multiple methodology 4.30 - 6.00 Valuation in M&A – Discounted cash flow methodology 7.00 - 8.30 Joint strategy case: David Jones & Woolworths SA Sunday 12 June 1.00 - 2.30 Valuation case: Warrnambool Cheese & Butter 3.00 - 4.00 Acquisition financing Thursday 7 July 10.00 - 11.30 Post-merger integration 1.00 - 2.30 Post-merger integration (continued) 3.00 - 4.30 PMI case: Southcorp & Rosemount 4.30 - 6.00 7.00 – 8.30

Sunday 10 July 9.00 - 11.30 Final examination

Capstone case – Healthscope & Symbion

4

Teaching Methodology

During the classes we will use a combination of lecture material, class discussion of concepts and principles and cases to illustrate the application of the concepts and principles in practical situations.

Textbooks

There are no set texts for the course. However, if you wish to purchase a text it should be noted that there are no comprehensive Australian texts covering all the topics in our course. The two texts below are both US books. Although much of the material is relevant it predominantly reflects US principles and practices. J Fred Weston, Mark L Mitchell & J Harold Mulherin, Takeovers, Restructuring, and Corporate Governance, Pearson New International Edition 2014 (Note: if you can pick up a 2004 4th edition it would serve equally well) Donald M DePamphilis, Mergers, Acquisitions, and Other Restructuring Activities, 7th Edition, 2014, Academic Press; an imprint of Elsevier

Faculty Information

Email: d.trende@mbs.edu Phone: Business hours: 03 9593 2022

Assessment

The final grade in the subject will be comprised of the following elements: Syndicate assignment case studies Japan post & Toll Holdings assignment - due at 8.00am on Saturday 11 June 15% Southcorp & Rosemount assignment - due at 3.00pm on Thursday 7 July 15% Individual assignment case study 20% Due date 10.00am on Thursday 7 July Final examination (Hurdle Requirement) 50% A ninety minute exam will be held at 9am on Sunday 10 July with 30 minutes reading and noting time. The exam will be based on a case that will be distributed to students at the beginning of Weekend 2.

5

Student Honour Code

Students enrolling in this subject are expected to subscribe to the Student Honour Code. This code is available for consultation on the Current Student webpage.

Late Submission The MBS teaching code states "if [assignments] are not in on time, they are regarded as not submitted. Late assignments will only be graded if (i) the student has applied for special consideration;

and (ii) that application is considered acceptable." Applications for extensions must be made before submission date, and will only be granted in exceptional circumstances.

6

Weekend 1

A. SESSION 1 - Thursday 9 June 10.00 – 11.30 am ABOUT M&A

M&A an overview of the landscape and its history

The keys to successful M&A B. OBJECTIVES

To gain an understanding of the context in which mergers and acquisitions take place

C. CONTENT

The M&A landscape o M&A terminology o Types of merger and acquisition o The process of M&A and its elements o M&A and economic turbulence o History – the six merger waves o Who wins and who loses o The importance of culture

The four keys to successful M&A

D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

Prior to this session read: o Prof. I Giddy, An Introduction to M&A, New York University o Booz & Co, “Strategic Due Diligence: A Foundation for Success”, June 2006 o M&A Glossary of Terms

7

A. SESSION 2 - Thursday 9 June 1.00 – 2.30 pm

REGULATION & STRUCTURING

The regulation of M&A and deal structuring in Australia B. OBJECTIVES

To understand the areas of law relevant to the regulation of M&A

To understand the essential nature of the regulatory rules

To appreciate the impact of those rules in practice

To understand the different types of takeover bids that may be made and their implications

C. CONTENT Regulation

The main rules in Australia: o Corporations Act o FIRB Act o Trade Practices Act o Listing Rules

Corporations Act objectives

The 20% rule

Essential concepts

The main exceptions

D. PROCESS Lecture, case and class discussion E. PREPARATION FOR THIS CLASS

Pre-reading for the course: o Herbert Smith Freehills, Takeovers in Australia, January 2016

Case reading for this session: o “Warrnambool Cheese & Butter: Press Commentary on the Battle for Control”

o “Japan Post’s Acquisition of Toll Holdings” o “The Acquisition of David Jones: Woolworths South Africa’s big bet on retail

Australia”

Structuring

Elements of deal structuring: o Who is the acquirer? o Assets or shares? o How to pay? o How to proceed? o How to position?

Takeover timeline

Bidder’s Statements

Target’s Statements

Action during a bid

The Takeovers Panel

Compulsory acquisition

8

A. SESSION 3 - Thursday 9 June 7.00 – 8.30 pm STRATEGY & TARGET SEARCH

Strategy and the search for targets B. OBJECTIVES

To understand the importance of strategy in M&A and its impact on the search for targets

C. CONTENT

Introduction

Strategy in the context of M&A

Mini case: International expansion of REA Group Limited

Why Buy?

Which Markets?

Which Companies?

Mini case: Dubai D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

For this session read: o L.E.K.Consulting, Executive Insights, Volume VII, Issue 3 “Screening for Success:

Designing and Implementing a Strategic M&A Screening Process”

9

A. SESSION 4 - Saturday 11 June 8.00 – 9.30 am SYNERGIES

Identifying and valuing synergies B. OBJECTIVES

To understand the critical role of synergies in M&A outcomes

C. CONTENT

what are synergies?

identifying synergies

synergies and corporate strategy

measuring synergies

synergies and business strategy

the strategic value of information D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

For this session read: o McKinsey & Co, Extract from “Perspectives on Merger Integration”, June 2010

pp 19-22 entitled “Opening the Apperture 1: A McKinsey Perspective on value creation and synergies”

o S. Loomer & A. Harrington, “Sharing Synergies”, Duff & Phelps

10

A. SESSION 5 - Saturday 11 June 10.00 am – 11.30 pm TERM SHEETS

The nature and use of term sheets as an acquisition tool B. OBJECTIVES

To understand how term sheets can improve the efficiency of the takeover process C. CONTENT

the nature of term sheets

the purpose of a term sheet

“trying it on” – a term sheet negotiation exercise

The detailed term sheet

Key points D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

For this session read: o Six Good Reasons for Term Sheets o The Corrs Guide to Term Sheets

11

A. SESSION 6 - Saturday 11 June 1.00 – 2.30 pm

DUE DILIGENCE

Due diligence B. OBJECTIVES

To understand why due diligence matters C. CONTENT

A precursor – confidentiality agreements/deeds

Due diligence: o What is it? o Why conduct it? o How is it done?

Relevance to sale agreements

Warranties and indemnities D. PROCESS Guest presentation and class discussion E. PREPARATION FOR THIS CLASS

For this session read: o GE Capital, “Due Diligence: Main Steps and Factors”, 2012 o Accenture, “M&A Due Diligence: What Corporates can Learn from Private

Equity”, 2011

12

A. SESSION 7 - Saturday 11 June 3.00 – 4.30 pm

VALUATION

Valuation in M&A – introduction and price multiple methodology B. OBJECTIVES

To understand valuation in M&A transactions

To understand how price multiple valuation models work

C. CONTENT

the role of valuation in M&A transactions

the valuation methods used in M&A

the nature and measurement of synergies

takeover premiums

the use of price multiples as a valuation methodology

understanding price multiple models D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

For this session read: o Trende – A Brief Valuation Summary o Michael J Schill, “Business Valuation: Standard Approaches and Applications”,

Darden Business Publishing, University of Virginia, Jan 2013 o Michael J Schill, “Business Valuation in Mergers and Acquisitions”, Darden

Business Publishing, University of Virginia, Oct 2013

13

A. SESSION 8 - Saturday 11 June 4.30 – 6.00 pm VALUATION

Valuation in M&A – DCF methodology B. OBJECTIVES

To understand the nature and use of DCF valuation in M&A transactions C. CONTENT

The nature of discounted cash flow (DC F) valuation methodology

Using DCF in an M&A conte3xt

DCF and price multiples: a comparison

Understanding the elements of DCF D. PROCESS Lecture and class discussion E. PREPARATION FOR THIS CLASS

For this session see readings for Session 7

14

A. SESSION 9 - Saturday 11 June 7.00 - 8.30 pm JOINT STRATEGY CASE

THE ACQUISITION OF DAVID JONES: Woolworths SA’s big bet on Australian retail B. OBJECTIVES

To explore corporate strategy in the context of acquisitions C. CONTENT

Discussion of the strategic reasons for Woolworths South Africa’s bid for David Jones

Analysis of whether those reasons represent sound corporate strategy.

Discussion agenda:

o How are Corporate Strategy and M&A related? o Nature of the department store industry o State of the department store industry at the time of the case o Future outlook for the department store industry o How similar are DJ and Woolworths business models? o What strategy has Woolworths pursued in the past? o Is the acquisition of DJs consistent with that strategy or is it on a new path? o Either way, does acquiring DJs make strategic sense? o Is the takeover paying off?

D. PROCESS Class discussion E. PREPARATION FOR THIS CLASS

For this session read: o THE ACQUISITION OF DAVID JONES: Woolworths SA’s big bet on Australian

retail

15

A. SESSION 10 - Sunday 12 June 1.00 – 2.30 pm VALUATION APPLICATION A. The valuation of Warrnambool Cheese & Butter

B. OBJECTIVES

To illustrate the application of the price multiples and discounted cash flow (DCF) valuation methodologies in M&A

C. CONTENT

Consider the KPMG valuation of Warrnambool Cheese & Butter in its Independent Expert’s report

The object of the valuation

Elements of the valuation

Methodologies adopted

Critique of the numbers

Discussion of the outcome

D. PROCESS Class discussion E. PREPARATION FOR THIS CLASS

For this session read: o KPMG Independent Expert’s Report, pp 14 - 45 and 61 - 73

16

A. SESSION 11 Sunday 12 June 3.00 – 4.00 pm ACQUISITION FINANCING B. To understand the role and importance of financing in the M&A process

B. OBJECTIVES

To provide illustrate the application of the price multiples and discounted cash flow (DCF) valuation methodologies in M&A

C. CONTENT

Consider the elements of determining the financing mix and sources of funds for acquisitions

Why does acquisition financing matter?

Forms of consideration

Concepts of debt capacity

Determining the right financing mix

Execution considerations

An example of determining financing mix (Warrnambool Cheese & Butter)

D. PROCESS Lecture and Class discussion E. PREPARATION FOR THIS CLASS

For this session read: o Trende – Acquisition financing strategies & perspectives

17

Weekend 2 A. SESSION 12 - Thursday 7 July 10.00 – 11.30 am POST MERGER INTEGRATION

Planning post-merger integration B. OBJECTIVES

To understand the need for pre-planning post-merger integration. C. CONTENT

Post-merger planning o The key challenges

Realize the synergies Start planning early.

o Developing an approach. Balance is the key A four phased approach The 100 day plan Deal with culture upfront

D. PROCESS Guest presentation and class discussion. E. PREPARATION FOR THIS CLASS

For this session read: o Chapter 36 of Robert F Bruner, Applied Mergers & Acquisitions, John Wiley &

Sons, 2004. o PwC, “Merger Integration Principles”, 2011

18

A. SESSION 13 - Thursday 7 July 1.00 – 2.30 pm

POST MERGER INTEGRATION

Implementing post-merger integration B. OBJECTIVES

To promote understanding of the critical importance of reaping expected synergies.

C. CONTENT

Post-merger implementation o Day 1 o Baseline the current position o Identify future options o Prepare for implementation o Track benefits

D. PROCESS

Guest presentation and class discussion E. PREPARATION FOR THIS CLASS

Read the following: o PwC, “Capturing Synergies to Deliver Deal Value”, November 2012

19

A. SESSION 14 - Thursday 7 July 3.00 – 4.30 pm

INTEGRATION CASE

How not to do it – Southcorp & Rosemount case B. OBJECTIVES

To promote understanding of the critical importance of post-merger integration – both its planning and execution

C. CONTENT

Discussion agenda: o State of the economy and the wine industry at the time of the case o Brief outline of Southcorp’s business and history o Brief outline of Rosemount’s business and history o The strategic rationale for the acquisitions o What challenges were faced by Southcorp post-acquisition? o How were these challenges dealt with? o What would you have done differently?

D. PROCESS

Class discussion E. PREPARATION FOR THIS CLASS

Read the Southcorp & Rosemount case study

20

A. SESSIONS 15 - 16 - Thursday 7 July 3.00 – 8.30 pm

CAPSTONE CASE

Healthscope & Symbion – an interactive syndicate based case

B. OBJECTIVES

To apply the elements of M&A that we have covered in the course to a real world example, thereby promoting understanding of the inter-relationships of all the pieces of a successful deal.

C. CONTENT

The case will comprise three rounds of analysis of a proposed healthcare industry acquisition, in your syndicate rooms.

Each syndicate will prepare a synopsis of its conclusions for each round, recorded on a pre-prepared poster.

Indicative timetable: 3.00 – 3.10 Case introduction 3.10 – 4.00 Round 1 analysis in Syndicate rooms 4.00 – 4.30. Round 1 class discussion 4.30 – 5.30 Round 2 analysis in Syndicate rooms 5.30 – 6.00 Round 2 class discussion 6.00 – 7.00 Dinner 7.00 – 8.00 Round 3 analysis in Syndicate rooms 8.00 – 8.30 Round 3 class discussion and wrap-up

D. PROCESS

Work on the case in syndicate groups over three rounds

Discussion and facilitation of each round by guest presenter E. PREPARATION FOR THIS CLASS

Read the UBS Healthscope and Symbion case