Syllabus andCase Packet for

Mergers, Acquisitionsand Restructurings

April-May 1999

Professor Robert F. BrunerDarden Graduate School of

Business Administration

Revised April 6, 1999This supersedes previous versions.

Materials ListMergers, Acquisitions and Restructurings

(GBUS 8102B, April-May 1999)

Required Book:

Robert F. Bruner, bound excerpts from a forthcoming book, Applied Mergers and Acquisitions. An excerpt of thisbook will be published by DEMS. This book surveys detailed issues, tools, and techniques which are useful inevaluating and designing transactions.

Optional Book:

Bruce Wasserstein, The Big Deal: the Battle for Control of America=s Leading Corporations, New York: WarnerBooks, 1998. This book presents an excellent overview of the history and practice of M&A. It should be purchasedfrom Courts&Commerce, Barnes & Noble, or an on-line bookseller such as amazon.com. Copies of this book areavailable in the Darden library. Six chapters are optional reading. However the entire book is recommended tostudents entering this field. Also, students in previous MAR courses have raved about this book and urged that it beretained in the course.

Case materials for distribution in advanceCase: AKennecott Copper Corporation@ (HBS: 9-278-143)Case AThe Upjohn Company: The Upjohn-Pharmacia Merger@ (HBS: 9-197-034)Case: ARhone-Poulenc Rorer@ (UVA-F-1015)Case: AThe Acquisition of Consolidated Rail Corporation (A)@ (HBS: 9-298-006)Case: AThe Acquisition of Consolidated Rail Corporation (B)@ (HBS: 9-298-095)Case: ARJR Nabisco@ (HBS: 9-289-056)Case: ACrown Cork & Seal/CarnaudMetalbox@ (HBS: 9-296-019)

Articles/Materials to be distributed in advance, requiring permission

APrice Protections in Stock-Swap Transactions,@ Mergers & Acquisitions, (September/October 1997) pages 22-28.

Materials to be distributed in class by Bob BrunerCase: AChrysler Corporation: Negotiations Between Daimler and Chrysler@ (UVA-F-1240)Case: ADaimler-Benz A.G.: Negotiations Between Daimler and Chrysler@ (UVA-F-1241)

Spreadsheet files: (see the intranet, dardenfiles/casedata/finance/)ARB.XLSEVNT.XLSVALUE_MERGE.XLSDEAL_BOUNDARIES.XLSUPJOHN_PHARMACIA.XLS

Rev. April 6, 1999This supersedes previous versions

Course Introduction and Syllabus for:MERGERS, ACQUISITIONS AND RESTRUCTURINGS

(GBUS 8102B, April-May 1999)Professor Robert F. Bruner

Faculty Office Building, Room 285tel.: 924-4802

email: brunerb@darden.gbus.virginia.eduURL http://faculty.darden.edu/brunerb/

Course Objectives1. Stimulate the development of a critical point of view about M&A. A university

course should help you build aAview@about M&A strategy and the environment. It islikely that virtually all students in the Darden class of 1999 will be involved (willingly ornot) in an M&A transaction at some point in their careers. The course aims to build amindset with which to anticipate and understand such an occurrence. One=s mindsetshould have a sense of:

-cycles, lore and jargon of the M&A field.-motives that drive firms to combine and restructure.-outcomes for investors in M&A transactions.-why mergers succeed or fail.

The course argues that to Ahave a view@ about M&A requires familiarity with thesedimensions.

2. Exercise analytical tools and concepts of transaction proposals. The effectiveanalysis of transaction proposals aims to reveal important insights quickly and clearly. The course will introduce new tools and concepts applicable to M&A deals, and combinethese with a wide range of other tools acquired in previous course work at Darden. Analysis will draw on fields such as accounting, tax, law, game theory, capital markettheory, and corporate finance. The course will emphasize the importance of developing skills to analyze a deal efficiently.

3. Develop skills in the design of transaction proposals. The course will survey a widerange of constraints and objectives and engage in the creative process of finding attractivedeal structures. The course will include an exercise in deal design, in which teams ofstudents will be asked to negotiate terms of merger, and then to justify their proposed dealin a written memorandum to the CEO of their firm. This third objective focuses on skillsof deal design and deal leadership.

4. Do stuff and have fun. All of the italicized words above are the big themes of thecourse. We=ll engage them actively. And I plan to have a good time at it (you shouldtoo.)

Focus and Scope

MAR will draw on cases and examples with the following leanings:The large publicly-held corporation headquartered in the U.S. or abroad.Mainly oriented to Finance, though the course will draw in contributions from accounting, law,

strategy, organization, and game theory. Primary attention will be given to U.S. laws and regulations.Mainly oriented to transaction design, rather than the development of long-term policies.

Positioned as it is toward the end of the second-year of the MBA program, the course willassume some prior exposure to financial analysis and to some of the issues in mergers,acquisitions, and restructurings. The course, Valuation in Financial Markets, is a pre-requisitefor MAR. The intent is not to duplicate, but rather to build upon the work of these other courses.The aim will be to synthesize new ideas presented in this course, as well as ideas encounteredpreviously to achieve the course goals.

Course Requirements and GradingThe final grade in the course will be determined with these components and weights:

50% Class participation. Regular attendance and participation are expected. Absence frommore than two classes for reasons other than personal illness, family emergency or otherseriously extenuating circumstance will materially affect the class participation grade. Please call or e-mail Professor Bruner to explain absences.

40% Paper and peer evaluation for team-based deal negotiation exercise. Teams are assigned. Evaluation will be based on direct observation, grading of a team paper, and peerevaluation questionnaires. The papers are due at the start of class on Thursday, May 6,and will be the focus of discussion in that class. For more information about this, see theassignment discussed for April 19 and May 6.

10% Short paper. This paper is to be prepared individually, and is due at the start of class onMay 10. The paper may not exceed 5 pages, double-spaced, typewritten. The subject ofthe paper is to be your personal learnings from the course. The paper should addressthese questions (and any others you deem important):

1. What is the most surprising or important idea you learned about M&A from thiscourse? Why is it surprising or important to you?2. So what? How will your discovery affect your thinking about M&A? About businessmanagement? About your work after Darden?3. What unanswered questions has this course raised?

Course Resources and PlanThe materials list for the course surveys the resources for the course.

1. Regular case studies will be the focus of 6 of the class meetings.2. The merger negotiation exercise will account for 5 class meetings.3. Lectures, supported by technical notes or chapter readings will be the focus of 3 meetings. 4. Attendance at the LASA program supports student preparation of a short required paper oncross border acquisition. This accounts for one class session, on April 22.

The sessions of MAR will be structured as indicated in the following table. Note my

guesses (r) where I suspect you=ll engage the big themes of the course. Note also the estimatedreading load. The average daily required reading is 18 pages. But the reading is front-end loadedto leave time for you to work on your deals, so plan your time accordingly. Also note thesuggested optional readings. ABreadth@ readings would be useful for people headed intoconsulting or general management. ADepth@ readings would be useful for those headed intoinvestment banking or corporate finance. You choose.

Areas of Key Learnings/Themes Pages of OptionalReading

Class #,Date

Key Materials Topics, Objectives, Key Ideas

Strategy Analysis Deal Design Leadership

Pages ofRequiredReading

Breadth Depth

1. April 15 AKennecott/Carborundum@

Introduction to various themes ofthe course.

r r r 20 0 36

2. April 16 AHow to Read a ProxyStatement@

Framework of deal design. Financial engineering in M&A.

r r r 33 20 26

Weekend

3. April 19 ADaimler@/ AChrysler@ Introduction to merger negotiationexercise

r r r 43 30 39

4. April 20 Chapters onAccounting and Formof Reorganization

Tax and accounting dimensions ofdeal design.

r r 32 18 28

5. April 21 AUpjohn/Pharmacia@ Accounting, valuation, and findingjoint benefits in deal design.

r r 31 0 0

6. April 22 LASA Conference(No class meeting)

Cross-border M&A. Analysis of theM&A environment. Deal search.

r r r 7 15 47

Weekend

7. April 26 ARhone-Poulenc Rorer@ Designing terms of payment. r r 20 0 6

8. April 27 AUnderstandingTakeovers@

Introduction to hostile takeovers. r r 19 83 32

9. April 28 AConsolidated Rail@ Analysis of a hostile contest forcontrol.

r r r 37 0 0

10. April 29 @RJR Nabisco@ Analysis of deal financing. r r r 15 23 14

Weekend

11. May 3 No class scheduled. r r 0 0 0

12. May 4 No class scheduled. r r 0 0 0

13. May 5 No class scheduled.

This time is provided fornegotiations and preparation ofpapers in the Daimler/Chryslerexercise, and your learnings paper.

r r 0 0 0

14. May 6 Daimler/Chryslerdebriefing.

Papers due. Debriefing andepilogue.

r r 0 0 0

15. May 7 ACrown Cork & Seal /CarnaudMetalbox@

Comprehensive deal analysis andsummary.

r r r r 19 0 0

Average/Day 18.4 12.6 15.2

Assignment forThursday, April 15

ObjectivesIn this opening case we seek to set themes for the entire course that will begin to frame

the way we think about takeovers and restructurings. These themes are summarized in the basicframework of the course, that good mergers and acquisitions are a result of:! good strategy. One should ask whether the transaction has good motives, a good

industrial rationale, or harnesses well important forces of change in the business?! good analysis. Has the homework been done? Has it been done well? Careful due

diligence research and valuation analysis are the keys to this stage. We know from earliercourse work at Darden that there are no right answers in finance, though there are manywrong ones. Today=s case is a good opportunity to brush up on techniques for valuing thefirm.

! good deal design. There is more to a deal than price. Does the design of the dealanticipate needs of various players, and balance them effectively? Does the design makesense for the strategy of the buyer?

! leadership. Has the deal process been guided in a way to bring out the best strategy,analysis and design work? In whose interests is the leader governing?

We will revisit these themes throughout the course.

Required PreparationCase: AKennecott Copper Corporation@ (HBS: 9-278-143)

Optional PreparationDepth: AValuing Firms@ in Applied Mergers and Acquisitions

Study Questions 1. Critically evaluate the methodology employed in the case for evaluating the proposed

acquisition of Carborundum by Kennecott. How does Kennecott=s planned change inCarborundum=s capital structure affect the analysis? What other methodologies can beapplied in evaluating the proposed deal?

2. What potential economies or synergies are associated with the proposed union? Is there astrategic fit here?

3. Based upon your analysis, is Carborundum worth $66 per share to Kennecott? Whatshould be the impact of the proposed union on Kennecott=s shareholders? As an outsidedirector, how would you argue and vote on the resolution to tender for Carborundum?

4. Review management=s decisions over the ten years covered by the case including theacquisition of Peabody, its divestiture, the proposed use of the proceeds of the Peabodysale and the selection of Carborundum as the acquisition target. What were themotivations underlying these decisions? Were they in the best interest of shareholders?Critically evaluate the motivation, performance, and role played in these decisions byKennecott=s board of directors and its outside legal and investment banking expertadvisers.

Assignment forFriday, April 16

ObjectivesAn important objective of this course is to explore the linkage between the original

motives for merger, and the detailed form that the merger agreement takes. This session gives usthe opportunity to survey in detail one of the important documents in M&A, the merger proxystatement. We will learn how to scan this document for useful insights necessary to developing aAview@ about the proposed deal. The discussion of motives, and the fine points of the resultingdeal, raise a number of important themes which we shall revisit during the course.

Required preparationChapter: “The Merger Proxy Statement: How to Read It and What it Reveals,” In Applied

Mergers and Acquisitions

Optional preparationBreadth: AIntroduction to Deal Design@Depth: AValue_Merge.xls: when and How to Use the Model@Depth: network file: deal_boundaries.xlsDepth: network file: value_merge.xls

Assignment

1. What is the origin of the acquisition of Maxus by YPF? What strategic forces (orApistons@ of change, to use Bruce Wasserstein=s term) appear to be behind this possiblecombination?

2. Why did the Maxus board choose to back YPF=s bid, rather than Amoco=s?

3. The merger proxy describes the resulting deal. Sketch the major terms of the deal.

4. In preparing to discuss this document, try to develop answers to the questions on thecover page. Based on your reading of this document filed with the SEC, what importantinformation does the Merger Proxy Statement contain, and what does it not contain? Prepare to summarize the terms of this deal, and why you think those terms might beworth mentioning to an M&A professional?

Assignment forMonday April 19 and Thursday, May 6

Daimler/Chrysler Merger Negotiation Exercise

This exercise simulates the acquisition negotiation between Chrysler Corporation andDaimler-Benz A.G. The parties willingly come to the negotiating table, so in that sense it is a"friendly" negotiation. There are strategic reasons favoring the combination. And finally,leaders of the two firms hope an agreement can be reached. You have been assigned to a team inwhich you must complete this first simulation. Professor Bruner will distribute the team list, anda case containing private information for your team. The task for the student teams is tonegotiate the detailed terms of acquisition and to prepare a written analysis describing yourproposed terms, and a justification for them.

This simulation will use the true names of the parties to the negotiation. It must be ourshared understanding in this course that students will not attempt to discover the actual outcomeof the negotiations. The actual outcome does not necessarily represent the "right answer" in thissimulation. One's learning is maximized through strictly original effort. Moreover, because thisis a simulation, there may not be only one right answer; what matters most is the form, breadth,and creativity of your work. Remember, this is a simulation. There are no right or wronganswers in the exercise; there is no script that you are to follow. The results are entirely of yourown making. Negotiations with your counter party may not begin until April 29, followingsubmission of your pre-negotiation report.

TEAM PAPER ASSIGNMENT

Please prepare a written recommendation to the board of your firm, justifying the termsyou negotiated, and recommending that they carry it to the shareholders for approval. The goalof this assignment is to exercise the broad range of skills developed in this course in thedevelopment of the design of an M&A transaction. The paper is due at the start of class onThursday, May 6. Here are some suggestions:

! Assess the desirability of combining these two firms in an acquisition. Think criticallyabout the motives and economics of combination.

! Conduct a sensitivity analysis of value, dilution, and accounting results. An excelspreadsheet file, assigned separately, may help in this regard, though you are not requiredto use it. The second section of your report should describe your estimated value, the keydrivers, and the impact of various possible deals on dilution, stock price, and accountingresults.

! Justify the deal structure for your negotiated combination. Be as specific and detailed aspossible. One of the aims of this course is to illuminate the enormous range of choice indeal design. Your paper should reflect a grasp of this range in discussing why your dealstructure dominates alternatives. The fourth section of your paper should present yourrecommendation.

Daimler/Chrysler Merger Negotiation Exercise -- continued

! Package your paper in the form of a deal summary to the board of directors of the sortthat an officer of a firm would use to gain the mandate to take the deal to shareholders forfinal approval.

Remember that to be successful, this proposal requires careful analysis, balanced advocacy andeffective presentation. This requires attractive format, crisp and concise wording, backed upwith appendices that contain greater detail for the interested client.

There is no page limit, though be considerate of the reader.

Required preparation:1. Read your case (either AChrysler Corporation@ or ADaimler-Benz A.G.@)2. Study the spreadsheet model associated with your team=s role in the simulation.

Optional preparation:Breadth: Read the chapter, APresenting Transaction Proposals,@ in Applied Mergers and

Acquisitions.Breadth: Read the chapter, ADeal Leadership,@ in Applied Mergers and Acquisitions.Depth: Read chapter 17 AImplementing the Deal@ in The Big Deal by Bruce Wasserstein.

Schedule of EventsMonday April 19 Separate role briefings for Daimler teams (11:45-12:30) and Chrysler

Teams (12:30-1:15)Thursday, April 29 Pre-negotiation reports are due at the start of class. Negotiations may

begin thereafter.Thursday, May 6 Team papers are due. Debriefing of negotiations; discussion of completed

deal; consideration of post-merger integration issues; discussion of dealleadership.

Study Questions for Advance Preparation

The following questions will help focus your preparation:

1. What do you believe Chrysler is worth? Prepare a careful DCF analysis using thefinancial forecast of free cash flows given in the case, and in the associated spreadsheetfile. What key financial assumptions determine the range of high and low values in yourvaluation analysis? Also draw on any other valuation approaches and information thatyou can.

2. What are the advantages and disadvantages of a combination between Daimlerand Chrysler What is your best alternative to a negotiated agreement with your counterparty?

Daimler/Chrysler Merger Negotiation Exercise -- continued

3. What risks do Daimler and Chrysler face in this proposed merger? Consider arange of transaction, financial, and operating risks. What effect do these risk factors haveupon the value of Chrysler?

4. From your perspective as a negotiator for your company, what are your goals inthis negotiation? What do you expect are the goals of the other team?

5. Develop a negotiating strategy, including an identification of your opening andwalk-away bid (ask) prices. You must justify your walk-away price.

Confidentiality of Information and Results

Please respect the confidentiality of your and your counter party=s information. Oncenegotiations begin, you may choose to reveal your information and/or ask to see your counterparty=s information. (Note that doing so has important strategic implications, about which youshould think carefully.) Until negotiations begin, stick to your own information.

Confidential Pre-negotiation Team Report

Due at class on April 29

Your team: (check one) Daimler________; Chrysler_____________

World __________________

Team-members= names:___________________________________________

Report your opening and walk-away prices for Chrysler, Daimler, and the resultingexchange ratio.

Please assume a share-for-share exchange for the purposes of reporting here (though youare free to negotiate entirely different terms of payment, if you like). Please quote all bid andasking values in U.S. dollars per share of each firm=s stock. This convention is simply to put allinitial prices reported here on a similar basis. You need not restrict your negotiations, bids, ortransactions to this type of transaction.

Chrysler Daimler-Benz Exchange Ratio

At the opening ofnegotiations

$_____.___ per shareThis is your openingoffer/asking price per share ofChrysler at the start ofnegotiations.

$_____.___ per shareThis is your openingoffer/asking price per share ofDaimler at the start ofnegotiations.

____.___ shares ofDaimler per share ofChrysler

Walk-away prices $_____.___ per shareThis is your openingoffer/asking price per share ofChrysler beyond which you willabandon negotiations.

$_____.___ per shareThis is your walk-awayoffer/asking price per share ofDaimler beyond which you willabandon negotiations..

____.___ shares ofDaimler per share ofChrysler

On the reverse side, please:! Justify your walk-away price.

! list your three most important negotiation objectives. Discuss what you hope to achieve,and why.

Assignment forTuesday, April 20

ObjectivesThis class session extends the discussion of deal design by focusing on the issue of form of payment, andhow choices about accounting and taxability of the transaction influence payment. We will survey brieflyaccounting and tax issues, and then turn to a discussion of examples.

Required readingIn Applied Mergers and Acquisitions

Chapter: AChoosing the Form of Acquisitive Reorganization@Chapter: AFinancial Accounting for Mergers and Acquisitions@

Optional readingBreadth: AMomentum Acquisition Strategies@ in Applied Mergers and AcquisitionsDepth: Chapter 16:AStructuring the Deal@ in The Big Deal.

Assignment1. Review the mechanics of pooling and purchase accounting and the eight forms of transaction.

Summarize the advantages and disadvantages of each, and their implications for choice of the formof payment.

2. Please review the following examples (in all of these cases you are advising the buyer) andrecommend a form of transaction, accounting choice, and form of payment. Keep a list ofquestions you would like to ask the Buyer.

a. Buyer is a conglomerate with an unflattering record of financial performance. The poorperformance reflects mature markets and the absence of growth, plus high financial leverage. EPShas been flat for three years. Buyer management is concerned that disgruntled shareholders mightuse the next shareholder meeting to create trouble. Target is a pesticide manufacturer, withpotentially large environmental liabilities. The Target firm is majority-owned by two families andthe rest by public institutional investors.

b. Buyer is an American consumer package goods manufacturer eager to obtain foreign operationsand brands. Target company owns several attractive foreign operations and brands. Newspapersreported recently that Target was accused of bribing government officials and using sweatshoplabor--both subject to corporate criminal penalties under new laws in that country. The owner ofTarget is an entrepreneur who claims to have paid no taxes for years, and to have a Swiss bankaccount. If the entrepreneur takes Buyer company shares, she will have enough voting power toelect two directors.

c. Buyer and target are software firms of similar size and outlook, though they occupy differentsegments of the market. Software developers of both firms are significant shareholders. It ishoped that they will remain with the new firm--certainly the hall talk at both firms favors thecombination. Neither firm has known or hidden off-balance sheet liabilities. The only difficulty isthat a cranky angel investor of the Target controls 20 percent of the shares and opposes the deal. The Target=s bylaws require only 51 percent of the shareholders to approve the deal.

Assignment forWednesday, April 21

Objectives

This class session knits together various ideas from previous sessions. We will evaluate theterms of the proposed combination of Pharmacia and Upjohn from the standpoints of strategy, accounting, valuation, and control.

Required reading

Case: AThe Upjohn Company: the Upjohn-Pharmacia Merger@ (HBS: 9-197-034)Network file: Upjohn_Pharmacia.xlsNetwork file: Deal_boundaries.xls

Assignment

1. Please strategic drivers (or Apistons,@ as Wasserstein would say) that appear to motivatethis combination. Is the industrial rationale for this deal appropriate?

2. Had this deal been accounted for on a purchase basis, what would have been the impacton reported EPS? On the balance sheet of Newco? (See upjohn_pharmacia.xls.)

3. From Upjohn=s standpoint, was this a Awin-win@ transaction, or did one or both of theparties lose? (See deal_boundaries.xls.)

4. In the resulting firm, what will be the distribution of votes between the former Upjohnand Pharmacia shareholders? What possible issues does your answer raise?

5. The firm anticipates employing several operational headquarters. What is the motive forthis? What issues might this raise for the integration of the two firms?

Assignment forThursday, April 22

There will be no regular class meeting today.Instead, please attend at least one session of the LASA conference.

ObjectivesAttendance at the LASA conference, and the suggested readings, afford a perspective on

strategy and the M&A environment as they influence merger search. Wasserstein argues thatM&A activity is driven by large forces at work in the global economy. If so, then identifying andunderstanding those forces will illuminate deal opportunities. Latin America is an extremelyinteresting laboratory for M&A because of forces at work there. The conference also gives anopportunity to reflect on the challenges of cross-border M&A, a focus of special interest in thiscourse (see the readings on YPF/Maxus, Upjohn/Pharmacia, Daimler/Chrysler, Rhone-Poulenc/Rorer, Crown/Carnaud).

Required preparationChapter: “M&A and the Business Environment when Countries Integrate: the Instance of

Euroland@ in Applied Mergers and Acquisitions

Optional preparationBreadth: AListening to Markets: The Top-Down Approach to Merger Search@Depth: In Bruce Wasserstein, Big Deal, read pages 1-5 and at least one of the following

chapters:8. AThe Energy Wars@9. AMetamorphosis: Conglomerates Transformed@10. AFinancial Services in the Digital Age@11. AThe Telco Revolution@12. ARacing Toward Cyberspace: The Media and the Message@13. AThe Tumultuous World of Health Care@

Required Attendance

MAR will not meet today. Please attend at least one of the sessions of the Latin AmericanStudents Association conference. This conference will provide useful background for yourreflection on cross-border M&A.

Assignment1. How will economic integration likely affect M&A activity within Latin America?

Between Latin America and other regions of the world?2. Was YPF=s acquisition of Maxus a random occurrence, or part of a systematic change in

the business environment?3. What are the key drivers of change (or Apistons@ to use Wasserstein=s term) that will push

M&A activity in this region?4. Where are the business opportunities in this turbulent environment? How can M&A

serve the access of those opportunities?

Assignment forMonday, April 26

Objectives

In this class we address the fact that the value that passes from buyer to seller in atakeover is only one dimension of the deal terms. Another very important dimension is the formof payment. We will consider how payment terms influence the attractiveness of a proposeddeal, and how artful design of terms can assist (or inadvertently bar) the settlement of the deal.

Required Preparation

Case: ARhone-Poulenc Rorer@ (UVA-F-1015)

Optional Preparation

Depth: APrice Protections in Stock-Swap Transactions,@ Mergers & Acquisitions,(September/October 1997) pages 22-28.

Study Questions

1. Why were the contingent-value rights offered in this deal? What purpose did theyor do they serve?

2. What was the aggregate value of these rights at the date the merger wasconsummated? What was their value at the date of the case? Why did this valuechange?

3. How have the public investors in Rhône-Poulenc Rorer fared since the acquisition? Was the unusual structure of the deal a benefit or detriment to them?

4. What is the impact of the contingent liability on Rhône-Poulenc=s (i.e., the parent=s)financing and strategic plans? Was the unusual structure of the deal a benefit or adetriment to Rhône-Poulenc?

Assignment forTuesday, April 27

Objectives

Thus far, the focus of the course has been on Afriendly@ transactions. The introduction ofhostilities or a contest of any sort introduces yet another dimension for the transaction designer toconsider: the likelihood that the terms will appeal to a very special set of investors, thearbitrageurs. This added dimension of Alikelihood@ means that the deal designer must dwell in aworld of probabilities, rather than certainties--the truth is that this is always the case, and is thereason why we must survey some tools and concepts regarding arbitrageurs and theirprobabilistic mentality.

This class will be devoted to a quick review of the questions below, and any questions thereadings may raise, and to viewing a videotape regarding hostile takeovers.

Required readingChapter: AUnderstanding Takeovers@ in Applied Mergers and AcquisitionsNetwork file: EVNT.XLS

Optional readingBreadth: Chapter 18: A Offense: Battlefield Tactics@ in Big DealBreadth: Chapter 19: ADefense: Fight or Sell?@ in Big DealDepth: "The Leveraged Restructuring as a Takeover Defense: The Case of American

Standard," Robert F. Bruner, Robert S. Harris and Donald Benson, chapter inApplied Mergers and Acquisitions

Network file: ARB.XLS

Assignment1. On February 22 Olivetti made an unsolicited tender offer of one million lira per share of

Italia Telecom. The management of Italia Telecom quickly rejected the offer, anddeveloped a restructuring plan that seemed likely to revalue the firm at 1.2 million lira pershare. Suppose that Olivetti privately estimated the maximum value of Italia Telecom tobe worth 2 million lira per share. The investment community was sharply divided on thelikelihood that a white knight bidder would compete for Italia Telecom. Six or seventelecom service providers in the world were large enough to acquire Italia. Please preparean EVNT data table as discussed in the chapter reading, and recommend to what priceOlivetti should revise its bid following the restructuring plan announced by ItaliaTelecom.

2. What is the strategic impact of restructuring by the target firm in the context of a hostileattack? When is restructuring likely to succeed as a defensive measure?

3. Who are the Aarbs@? What are their motivations in a hostile takeover? Why should theyhave any place in the thinking of deal designers?

Assignment forWednesday, April 28

Objectives

In this class, we will look at a hostile contest for control. This will exercise valuationskills, strategy concepts, and deal design frameworks presented earlier in the course.

Required Preparation

Cases: AThe Acquisition of Consolidated Rail Corporation (A)@ 9-298-006AThe Acquisition of Consolidated Rail Corporation (B)@ 9-298-095

Study Questions

Study Questions for the (A) Case1. Why does CSX want to buy Conrail? How much should CSX be willing to pay for it?2. Please analyze the structure of CSX=s offer for Conrail.

A. Why did CSX make a two-tiered offer? What effect does this structure haveon the transaction?B. What are the economic rationales for and the takeover implications of thevarious provisions in the merger agreement (i.e., no-talk clause, lock-up options,break-up fee, and poison pill shareholder rights plan)?

3. As a Conrail shareholder would you tender your shares to CSX at $92.50 in the first-stageoffer?

Study Questions for the (B) Case1. Why did Norfolk Southern make a hostile bid for Conrail?2. How much is Conrail worth? In a bidding war, who should be able to pay more, Norfolk

Southern, or CSX?3. Why does CSX refer to Norfolk Southern=s bid as a Anon-bid@? What should Norfolk

Southern do as of mid-January 1997?4. As a shareholder would you vote to opt-out of the Pennsylvania anti-takeover statue?

What do the capital markets expect will happen?5. What are the costs and benefits of regulating the market for corporate control through

statutes such as Pennsylvania=s opt-out law?

Assignment forThursday, April 29

Objectives

This discussion concludes our survey of main features of transaction design. The focus of thisclass will be the adequacy of financing. The chapter reading offers a framework within which toassess the competing bids of management, KKR, and First Boston for RJR Nabisco. This is oneof the most notable acquisitions in business history, and for that reason alone, deserves someattention in a course on M&A. This deal is an excellent vehicle for considering the financingimplications of deal structure.

Required readingCase: ARJR Nabisco@ (HBS: 9-289-056)

Optional readingBreadth: AFinancing the Acquisition@ in Applied Mergers and AcquisitionsDepth: "The Crash of the Revco LBO: The Hypothesis of Inadequate Capital," by Robert

Bruner and Kenneth Eades, chapter in Applied Mergers and AcquisitionsAssignment

1. Prepare to summarize the events leading up to the choice of bids by the SpecialCommittee of the Board of Directors. Evaluate the Special Committee=s use of an auctionof RJR Nabisco.

2. Prepare to discuss and compare the bids by management and KKR. What might accountfor the differences in the proposed deals?

3. Compare the resulting financial structures and financial forecasts under the two plans. Which plan has the greater default risk? How do you define default? What is yourevidence? Please prepare to give findings of sensitivity analysis.

4. Based strictly on financing considerations which bid should the Special Committee of theBoard of Directors accept? Why? What other actions should the Special Committeetake?

Assignment forFriday, May 7

Objectives

This concluding case provides a wide range of opportunities for exercising frameworks, tools andconcepts presented in this course.

Required reading

Case: ACrown Cork & Seal/CarnaudMetalbox@ (HBS: 9-296-019)

Assignment

1. Should Crown try to extend its global reach by acquiring CMB? What are theadvantages/disadvantages of being a global seller? A global buyer?

2. What is the maximum price/share Crown should offer to acquire all of CMB=s commonstock? Assume the following:A. Growth in annual sales for CMB starting at 6% in 1995 and trailing off to 3% by theyear 2000.B. Raw material purchase savings for the combined firm equal to .005 of CMB=s sales in1996 rising to 0.15 of CMB=s sales by 1998.C. Reduction of CMB=s SG&A/Sales ratio of .01 in 1996 rising to .02 by 1998.D. An 11% cost of capital for the acquisition.

3. If none of the cost efficiencies assumed above could be realized by Crown, how muchwould a CMB common share be worth of Crown?

4. What would you recommend should be Crown=s maximum offer for CMB=s stock?

5. What proportion of cash versus stock do you hope to achieve as Crown=s management? How might you induce CMB=s shareholders to tilt their willingness to accept stock orcash in the proportions you hope to achieve?

6. What can Avery do to reduce the risks of this cross-border transaction?

7. What should Antoine Selliere require in order to assure ongoing influence at Crown in thefuture? What should William Avery require in order to assure that Crown=s managementwinds up running the combined company?

8. Crown and CMB were about the same size in sales and profits. Why was Crown theAacquirer@ in this transaction rather than CMB?