SUNY AT STONY BROOK FIN 552 Mergers & Acquisitions Tentative Course Syllabus Spring 2014

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1 SUNY AT STONY BROOK FIN 552 Mergers & Acquisitions Tentative Course Syllabus Spring 2014 I. Contact Information and Office Hours Professor : Gokhan Torna, Ph.D. Office : Harriman Hall, 250 Classroom : Frey Hall 201, MW 4:00 PM 5:20 PM Office Phone : (631) Gokhan.Torna@stonybrook.edu Office Hours : MW 3:00 PM 4:00 PM II. Course Description & Objectives This course focuses on hands-on insights into the practice of corporate value creation in the form of mergers and acquisitions (M&As). The techniques to be developed to effectively understand corporate valuation and make effective M&A decisions are the discounted cash flow valuation, comparable companies analysis, and precedent transactions analysis. One of main objectives of the course is to examine and evaluate the role that M&A plays in the contemporary corporate world, and its use as a strategic tool to provide growth, enhance competitive position, transform a company or industry, and create shareholder value. The secondary objective of the course is to apply the course material to a real-world in an attempt to form an analytical view of major corporate events in a team setting. Students should be able to demonstrate their abilities to work in team environment and to communicate the view in clearly written reports and professionally prepared presentations. III. Textbook Rosenbaum J. and J. Pearl: Investment Banking, University Edition, 2 nd Edition, Wiley. IV. Grading Midterm : 35% Term Paper : 35% Assignments, Quizzes : 15% Presentations : 15% There might be 4-5 assignments, directed readings (article summaries) as well as a few possible quizzes throughout the semester. Any missing quiz/assignment will be graded 0. There will not be any make-up homework, quiz or exam. Exceptions will be granted only in the case of documented illness, accidents etc. Assignments and case studies are group assignments. 1

2 Students are expected to demonstrate their ability to work in a team environment and submit their assignments/case studies in a written report. TERM PAPER: Term paper is a group project (max. 2 people) that involves conducting a M&A fundamental valuation for a company that you pick early in the semester from the list of public companies that comprise the S&P 500. Please review the M&A Sell-side Valuation Report distributed in the classroom. You should consider it as a template for your term paper. The careful use of modern desktop publishing software, graphics packages, and IT-based research tools is mandatory. Start with Bloomberg, which will substantially help you in this project and your future career. Familiarize yourself (as a group) with Bloomberg Terminals on Campus. Also use Yahoo Finance ( ( The Motley Fool ( or your favorite investment portal to retrieve data for your analyses. Various local and county libraries have assorted sources of industry and economic information. Economy: Economic Report of the President, Statistical Abstract of the United States, etc. Industry: The Value Line Investment Survey, Standard & Poor's Industry Surveys, Moody's Industry Reports, etc. Company information can be obtained from a number of primary and secondary sources. Check out Yahoo! for a compilation of interesting financial information on individual companies. Company Web sites are a good place to start for investor information. SEC reports filed on EDGAR ( are a must see for any investor. Articles in leading business publications often provide useful investment ideas, suggestions and projections for the company you picked. Read Barron's, Business Week, Forbes, Fortune, Investor's Business Daily, The Wall Street Journal, etc. An appropriate writing style is concise and to the point. Necessary issues must be raised and dealt with in an efficient manner. The report is expected to be pages in length. To be effective, each report must exhibit an engaging writing style. The written memo outline provided below may prove helpful in offering some structure to your analysis. TERM PAPER OUTLINE A. Executive Summary One page summary of the entire report with brief fundamentals about the company, current financial outlook, and the presentation of the intrinsic value of the company that you derived from DCF (Discounted Cash Flows) and Stock Multiples analyses. B. Macroeconomic Outlook for the country 1. What is the current macroeconomic environment for the country? 2. Briefly mention about political stability, economic growth, growth in population, labor, and unemployment, rates of inflation and interest, foreign direct investments etc. The Federal Reserve Bank of Philadelphia s Consistent Economic Indexes for the U.S. are available at: Personal income growth data can be obtained from the Bureau of Economic Analysis, employment and unemployment data can obtained from the Bureau of Labor Statistics, and the housing price data can be retrieved from the Office of Federal Housing Enterprise Oversight. C. Industry Analysis 2

3 1. How is the market structure? Is this a wonderful business? Look for rates of return on total capital to see if they consistently exceed 15% per year. 2. What are the major players? What is the market share of each competitor? 3. Does the company enjoy barriers to entry? Look for castles with big moats. Castle size is less important then moat size and depth. Rapidly growing companies in low growth industries may signal company-specific competitive advantages. 4. What is the average gross-margin for the industry? Are there any substitute, alternative products that can pose threats? D. Company Analysis 1. Description of the company, scope of business. Mission/Vision statement of the company. 2. SWOT Analysis 3. Does capable, shareholder-motivated management run the company? i. Year in and year out, does company performance meet shareholder objectives? Quality management is reflected in quality performance (i.e., ROE is high and the stock price goes up). ii. Does management own a significant percentage stake? 1. Be circumspect when management owns too small (below 10%) or too large (above 80%) a stake in the company. 2. Does management have a significant ownership stake when measured in dollars? 3. Check if Management has at least 5-10 years of salary worth of common stock. 4. Is managerial compensation determined by performance? 5. Are Savvy institutional investors on board? Check SEC reports on EDGAR for these questions (proxy statements, 13D filings, etc.). E. Historical Balance Sheet and Income Statement Analysis 1. A brief one-page summary format of balance sheet and income statement for the last three years. 2. Show the yearly changes in percentages in an additional column for each accounting item (horizontal analysis). 3. Do you see any pattern over the years? Can this pattern be based for future values? Is there any anomaly? Compare CAPX (Capital Expenditures) with Long-term Debt. Does company make wise use of leverage? (i.e., avoid it?) 4. Form a chart of financial ratios for each year. Start with the basic ratios such as current assets/total assets, fixed assets/total assets as well as CAPX/total assets, PPE/Total Assets, similarly Net Sales/Total Assets, Gross Profit (Gross-margin)/Net Sales, EBITDA margin, Marketing & Selling Expenses/Sales etc. Then show Liquidity Ratios (Current Ratio, Quick Ratio, Receivables Turnover, Inventory Turnover) and market performances (E/P, Divident Yield (D/P) etc.). All these ratios will help you set the future values of your income and balance sheet items through which you will derive equity/free cash flows. F. Projections 1. In the light of your historical values of income and balance sheet items and news that you collected from several investment portals regarding the prospect of the company as well as your intuitive assumptions, you will build up forecasted values of income statement and balance sheet for the next three years. 3

4 2. Once you build up the forecasted statements, the next step is to form the cash flow statements for the next three years. G. Valuation 1. Relative (Stock-Multiples) Valuation-Comparable Companies Analysis i. Construct the expected trading multiples for the major competitors such as EV/Sales, EV/Ebitda, MCap/Sales, MCap/Ebitda etc. ii. Based on the trading multiples, calculate the implied Enterprise Value and Market capitalization for your company. 2. Precedent Transaction Analysis i. Screen for recently completed comparable transactions ii. Examine the target s and comparable firms M&A history and determine stock multiples iii. Keep in mind the deal dynamics/motivations, and purchase considerations. Is it negotiated sale? The buyers are strategic buyers? Is it MOE transactions (A merger of Equals)? Is it all-cash transaction or stock-swap transactions or hybrid? iv. Benchmark the comparable Acquisitions and determine valuation. 3. Discounted Cash Flows (DCF) Valuation v. Beta Calculation vi. Cost of Equity or Cost of Capital Calculation vii. Discount all the future equity cash flows with the derived cost of equity viii. Add the terminal value (horizon value) to the discounted cash flows. TERM PAPER EVALUATION Evaluation Criteria Your reports are ranked and graded according to the following criteria: A. Completeness--How do accounting and financial ratios for the pick (pan) compare with industry and S&P index averages? Is this a good business? From sell-side perspective, what would be the range of valuation? What is the stock worth using DCF and Comparable Company and Precedent Transactions Multiples Analyses? How sensitive is the value to your assumptions? B. Clarity--Is an appropriate valuation method clearly described and effectively employed? Is market model (or Fama-French) beta and alternative risk indicators accurately estimated and clearly discussed? Are charts and scatterplot graphs used efficiently and clearly labeled? C. Originality--Is new insight offered? Is the value that you derive different from the current stock value in the market? What is everyone else missing? Why is the market consensus wrong? D. Professionalism--Does the project development meet high professional standards? Are information sources carefully cited and footnoted? MORE IMPORTANTLY, Could I take this paper to a tough job interview and get the job? V. Academic Integrity The faculty, instructors, and students of the College of Business adopt an academic code of integrity. We pledge to fulfill our mutual responsibilities to each other and the academic community at large with honor and integrity in order to build and maintain a climate of respect and trust that will enhance our teaching, research, and learning. All of us are expected to support the honor system of the school and not to tolerate activities that undermine academic integrity. As a student in the school, you will be protected by and expected to conduct yourself in accordance with this system. 4

5 VI. Students with Disabilities The staff of Disability Support Services department (DSS Resource Room 631; ) coordinates accommodations and services for SBU courses. Any student with a disability eligible for accommodation in SBU classes should contact DSS as soon as possible. VII. Intellectual Property Course materials prepared by the instructor, together with the content of all lectures and review sessions presented by the instructor are the property of the instructor. Video and audio recording of lectures and review sessions without the consent of the instructor is prohibited. On request, the instructor will usually grant permission for students to audio tape lectures, on the condition that these audio tapes are only used as a study aid by the individual making the recording. Unless explicit permission is obtained from the instructor, recordings of lectures and review sessions may not be modified and must not be transferred or transmitted to any other person, whether or not that individual is enrolled in the course. VIII. Tentative Course Outline Week 1. Introduction to M&As Directed Readings: Harford (2005), What drives merger waves?. Week 2. Introduction to M&As and Interpreting Financial Statements Directed Readings: Houston et al. (2001), Where do merger gain come from? Bank mergers from the perspective of insiders and outsiders. Week 3. Interpreting Financial Statements Directed Readings: Fee & Thomas (2004), Sources of gains in horizontal mergers: evidence from customers, supplier, and rival firms. Week 4. Comparable Companies Analysis for M&As J. Rosenbaum and J. Pearl, page Week 5. Comparable Companies Analysis for M&As J. Rosenbaum and J. Pearl, page Week 6. Precedent Transactions Analysis for M&As J. Rosenbaum and J. Pearl, page Week 7. Precedent Transactions Analysis for M&As J. Rosenbaum and J. Pearl, page Week 8. No Class: SPRING BREAK 5

6 MID-TERM EXAM Class: Monday, March 24 Week 10. Discounted Cash Flow Analysis (DCF) for M&As J. Rosenbaum and J. Pearl, page Week 11. Discounted Cash Flow Analysis (DCF) for M&As J. Rosenbaum and J. Pearl, page Week 12. DCF & Firm-selling Process J. Rosenbaum and J. Pearl, page & Week Student Presentations FINAL EXAM May 13, Tuesday, :30 pm-11:00 pm. 6