IUJ MBA, Fall 2008

Corporate Restructuring





International University of J apan (IUJ ) MBA Program

Graduate School of International Management


Fall 2008


Syllabus





Corporate Restructuring and M&A





Takato Hiraki
(Visiting Professor)
thiraki@kwansei.ac.jp
(0798)54-6973

thiraki@Iuj.ac.jp
x-516 at IUJ


2
Course Overview
This course is designed to provide second-year finance major MBA students with a general understanding of
financial and strategic aspects of financial restructuring and M&A transactions. The topics to be discussed
include transaction(s) that restructure the firm in some particular way. The objectives of this course are: (1) to
help the students build a framework to analyze corporate restructuring/reorganization transactions primarily
through techniques of financial analysis; (2) to provide an overview of approaches in corporate restructuring
and mergers and acquisitions, which can then be critically applied to solve the strategic problems of firms; and
(3) to establish an economic perspective from which to access corporate and social consequences of alternative
corporate restructuring and reorganization techniques. We deal with both international (mostly U.S.) and
J apanese cases in corporate restructuring and M&A.

Corporate Promotions and Reorganizations by Arthur S. Dewing

This book is a study in the financial policy of certain industrial corporations which at one time or another
have found it necessary to undergo a reorganization of their capitalization. The student of medical science
is often impressed with the light the study of the abnormal and irregular throws on the normal and natural
processes of life; one may hope that an analysis of the pathological instances of industrial enterprises may
be equally instructive regarding the normal functioning of a healthy and successful industrial corporation.


Course Structure
Prerequisites:
This course requires the students from other programs already taken financial accounting and corporate
finance (basic) finance courses.
Structure classified by case topics:
The course uses cases corresponding to specific restructuring transactions, which are approximately
classified into the four categories: i) Restructuring of Equity Ownership; ii) Restructuring through
Leverage Transactions; iii) Restructuring with Significant Strategic Options Involved; and iv) Mergers
and Acquisitions. Another dimension of this course is to lean J apanese corporate restructuring and M&A
from both Western and J apanese perspectives. A reading packet consisting of cases and articles will be
distributed.


Grading Policy (tentative)
Participation to Class Discussion (30%)
One Case Write-up (Group 30%)
Assigned Case Presentation (30%)
Attendance (10%)

Cases in a packet: All participating students have to pay and obtain a set of copies of the cases.

Reserved Materials

Weston, Mitchell and Mulherin (WMM), Takeovers, Restructuring and Corporate Governance (4th Edition),
Prentice Hall. (Takeovers, Restructuring, and Corporate Governance Fred J . Weston, J . Harold Mulherin
and Mark Mitchell (2008/9/30))

J ames K. Seward (JKS), Corporate Restructuring and Reorganization, mimeo.

.
3

Brealey/Myers/Allen (BMA), Principals of Corporate Finance, Ninth (International) Edition, McGraw-
Hill, 2008 [Part 10]



Weekly Scheduled Topics


Week Topics

Week 1 Brief Introduction and Overview

a) Overview of Corporate Restructuring: US Experience (and some J apanese experience)
b) Overview of Valuation Techniques

Required Reading:
WMM: PART IV, 288-328 & Chapter 16 (406-445) and JKS for Restructuring Overview
WMM: PART III, 232-256 and Appendices A & B in Chapter 16 for Valuation Overview


Week 2 (partly we use our time to complete the leftover in the week 1)
Equity Carve-out Transactions:
Required Reading:
WMM: PART IV, p. 288-328 and JKSs related parts
J .W. Allen, Capital Markets and Corporate Structure: The Equity Carve-outs of Thermo
Electron, Journal of Financial Economics (1998).
Optional Readings:
Case: Eskimo Pie
Case Study Questions:
Please assume that the target D/V for Eskimo Pie is set at zero.
1. Lets try to derive the standalone value of Eskimo Pie Corporation by using the DCF
method.
a) Cash flow projection of Eskimo Pie
For 1991 - 1993 thereafter, the company enters the steady state with a constant
growth rate.)
b) Using the data of the comparable firms of Eskimo Pie, lets compute its asset beta for
D/V=0 and R
V
=R
E
=WACC. (Assume the expected market risk premium is 7.5%
per year and the risk free rate is 7.42%.)
c) Optional -- Giving different values to the growth rate of net cash flow and the
discount rate, perform the sensitivity analysis. Please identify the range of the growth
rates and discount rates which jointly yield a higher value than the one offered by
Nestle.
2. Next, what is the standalone value of Eskimo Pie Corporation when the multiple-based
approach is used? Which multiple(s) are likely for the best value? See Ex. 8 more
carefully and choose two multiples.
3. Why did Nestle offer to buy Eskimo Pie? Is the value of Eskimo Pie for Nestle higher
than the standalone value?
4. As an advisor for Reynolds, which strategy would you recommend between the sale to
Nestle and the alternatively proposed IPO?

4

Week 3 Spin-off Transactions:

Case: Humana Inc. (HBS Case)
Case Study Questions:

1. Do you think Humanas problems were serious enough to warrant some form of
restructuring?
2. How much extra value would be created by separating the hospital and health plan
segments through a spin-off? What are the sources of this additional value, and how
should the spin-off be structured for Humana to realize maximum benefits from the
spin-off?
3. Kaiser Permanente has employed an integrated strategy of owning both hospitals and
health plans for many years, and some would argue with great success. This suggests
that Humanas problems are not the fault of its integrated strategy per se, and that
breaking apart the hospital and health plan segments may not enhance shareholder
value in the long run. Do you agree or disagree?
4. Do any of the other options considered by management represent a more sensible
solution to Humanas problems than the spin-off?

Required Readings:
WMM: PART IV, p. 288-328 (especially, p. AT&T case in Table 11.3 on p. 291) and JSKs
related parts
K. Schipper and A. Smith, The Corporate Spin-off Phenomenon, The Revolution in Corporate
Finance, (Stern & Chew, eds.), Basil
Blackwell Ltd., pp. 437-43.
P. Cusatis, J .A. Miles and J .R. Woolridge, Some New Evidence That Spinoffs
Create Value, Journal of Applied Corporate Finance (April 1994).


Week 4 Tracking Stocks:
(Targeting Stocks)

Case: USX Corporation (HBS Case)
Case Study Questions:

1. In 1986, then-chairman and CEO David Roderick described USX as possibly one of
the most restructured corporations in America. Even so, Carl Icahn believed that
further restructuring of the company was still necessary. In late 1990, what operating
and/or strategic problems, if any, do USXs two main businesses still face that would
warrant some form of additional restructuring?
2. Do you think there is any merit in Carl Icahns claim that problems in USXs steel
business are depressing the value of its energy business? As a USX stockholder, how
credible a spokesperson do you consider Icahn to be on this issue?
3. Which restructuring option Icahns spinoff proposal or the companys targeted
stock proposal will create the most value for shareholders? For creditors? For the
firms other stakeholders?
4. For what kinds of companies is targeted stock most appropriate? Least appropriate?
5. Should the company seriously consider any other options besides doing a spinoff or
issuing targeted stock?
5
6. If the company decides to go ahead with the targeted stock issue, what specific
provisions or features should the stock include to ensure maximum value creation?
How closely would you model USXs targeted stock on GMs alphabet stock?


Required Reading:
WMM: PART IV, p. 288-328 (especially, p. AT&T case in Table 11.3 on p. 291) and JSKs
related parts.
D. Logue, J . Seward and J .P Walsh, Rearranging Residual Claims: A Case for
Targeted Stock, (Financial Management, Spring 1996).



Week 5 Leverage and Management Buy-Outs

Classical Case of LBO/MBO
Classical MBO Case: RJR Nabisco
1. What was the value of RJ R Nabisco under:
a) the pre-bid operating strategy?
b) the Management Groups operating strategy?
c) KKRs operating strategy?
2. What accounts for any difference in the value of the three operating plans?
3. Evaluate the Special Committees use of an auction of RJ R Nabisco?
4. Which bid should the Special Committee select, if any? What other actions should
the Special Committee take?
Required Reading:
WMM: Chapter 16 and JSKs related parts


Week 6 Leverage Recapitalization

Case: Colt Industries (HBS Case)
Case Questions:
1. Why should Margolis consider a recapitalization at this particular point in time?
2. Explain how the leveraged recap transaction works, and what constraint a
successful plan must meet.
3. How is value created and/or reallocated in a leverage-increasing transaction?
Who benefits in the case of the Cold recap?
4. In general, why might a recap be used instead of a leverage buyout?

Required Reading:
M. J ensen, Agency Cost of Free Cash Flow, Corporate Finance and Takeovers,
(American Economic Review 76, 323-329, 1986)
WMM: Chapter 13 and JSKs related parts
I. Isik Inselbag and H. Kaufold, How to Value Recapitalizations and Leveraged Buyout
Steven Kaplan and J . Stein, How Risky Is the Debt in Highly Leveraged Transactions,
(Journal of Financial Economics 27, 215-245, 1990)


Week 7 M&A Activities in Japan

6
M&A Environment in J apan

Special Topic on the First (Hostile) TOB Made by Industrial Firm
Case: Oji Paper Manufacturing vs. Hokuetsu Paper Mill

Required Reading:
WMM: Chapter 1 (especially p. 10-11); Chapter 6
Questions:
1. How do you evaluate the business (value creation) and tender offer strategy
provide by the Oji management?
2. How do you evaluate the explanation made the Hokuetsu management to
decline the merger proposal of Oji?
3. How do you evaluate the overall result from an economic perspective and
other viewpoints?
(*A short-essay report is due for those platform students on exchange.)


Week 8 Group-Based Corporate Restructuring in J apan

Case: Holding Company System in J apan: NTT Group

Week 9 Real Options in Assets Traded
Case: MW Petroleum (A)

Case Questions:
1. What is the rationale of the deal? Why should we perform valuations?
2. What are the methods you will use to perform valuation and what are their values?
3. What are the options, and what are the values of the Strike, Underlying etc.?
4. How does Real Option Analysis differ from DCF or APV analysis?
5. How would you estimate the volatility parameter?


Case: MW Petroleum (B)

Case Questions:
1. Does the price sharing and price support agreements make sense? Why?

Required Reading:
HBS Notes: Real Options When Multiple Sources of Uncertainty Exist
WMM: Chapters 9 (especially, p. 238-243) and 22 (especially, p. 646-648)

*A full case write-up is due based on this case (MW Petroleum) for those registered on a 2-
creidt basis.

Week 10 Hostile Takeovers in the Global Telecommunication Industry

Case: Vodafone AirTouchs Bid for Mannesmann

Case Questions:
1. What was the strategic and economic rationale for Mannesmanns acquisition of Orange?
Did Mannesmann overpay for Orange?
7
2. Vodafone AirTpuch prposed that each Mannesmann share would receive 53.7 Vodafone
AirTouch shares, so that in aggregate Mannesman shareholders would own 47.2% of the
equity of the new combined firm.
a) Describe the stock swap. As of December 17, what was the market value of
Mannesmanns contribution to the combined firm? Assa Manessmann shareholder,
would you accept the current offer? As a Vodafone shareholder, would you support the
proposed transaction?
b) On December 17, 1999, based on real stock prices of the two firms, it seemed that the
market estimated the probability of Vodafone AirTouch successfully acquiring
Mannesmann at around 0.6. (We will obtain this figure in our discussion alter.) Under
the assumption that if the bid fails both firms would trade at prices prevailing on Oct. 21,
1999, what is the markets estimate of implied synergies from the deal?
c) What is the present value of the expected synergies as shown in Exhibit 10 as of March
2000? (You may want to assume that the synergies related to revenues and costs extend
beyond 2006, and that the merger will not affect the firms level of working capital.) Use
the average exchange rate of 1 =1.5789 to covert pound synergies into Euros.
d) UK equities returned 7.7% (on pounds) over the UK risk-free rat for the period 1919-
1993 and 6.8% over the UK risk-free rate for the period 1970-1996. How might this
observation affect your decision?

Required Reading:
WMM: PART V (especially, Chapter 17) & See: Case 17.3 on p. 480-4829

Case Presentation:
Weekly cases, Humana, USX, RJ R Nabisco, Colt Industries, MW Petroleum and Vodafone, are assigned to
each of the student groups for presentation. The student presentation is based on case questions before formal
class discussion of the case assigned. It is typically given 30 to 40 minutes. It should not include the case
background since we assume everybody is ready for the case discussion finishing very through case reading.
Each team should consist of 2 to 4 students. If required, some students may present twice or two cases rather
than one or one time. The student presentation schedule in the class MGMT folder should be completed in two
weeks before the Humana case start in week 3 by the course committee formed when we meet in week 1.