Business Acquisitions: Finance & Strategy Syllabus and Course Outline

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1 Business Acquisitions: Finance & Strategy Syllabus and Course Outline UCLA EXTENSION BUSINESS AND MANAGEMENT COURSE TITLE: Business Acquisitions: Finance & Strategy COURSE NUMBER: X Reg#W5137 QUARTER: Summer 2011 INSTRUCTOR: Alec Salemon Phone: (213) Fax: (213) MEETING TIMES: Thursday evenings 6:30PM to 9:30PM LOCATION: UCLA 1337 Public Affairs Bldg OFFICE HOURS: By appointment. Course Description This course is designed for students, entrepreneurs, professionals and individual investors looking to understand the process of business acquisition and the inner workings of private capital market from both capital seekers and investors point of view. The course begins with the discussion of the current economic conditions that drives some fundamental changes in the workings of private capital market. The course will also discuss private equity investment, including structures, deal processes, and common practices. The acquisition process is also covered extensively and includes sourcing acquisition leads and opportunities; evaluating industry strengths, risks, and financial analysis of a potential transaction. Due diligence topics include review of deal review processes, negotiation techniques, methods of working with transaction s target and other useful due diligence tools. An overview of valuation models include cash flow methods, historical price multiples by industry, size, or rate of growth and analysis of buildversus-buy decision. Structuring topics include term sheets, stock versus asset sale, structuring seller's participation and closing of agreement. Financing options also are covered, including fundraising process, working with individual partners, banks, mezzanine lenders, venture capitalists, and private equity groups. Students leave the course with an understanding of how to put together a deal, how to minimize overpaying, and how to increase their chances of success in a acquisition/merger transaction. Course Objectives, Purpose & Scope: The four fundamental course objectives are to (1) gain an overview of strategic issues driving each transaction, (2) understand the business acquisition process and the private capital market, (3) gain an overview of process to complete a business acquisition, and 6/13/11 2:45 PM

2 (4) gain an understanding of post-closing integration issues. Understanding the business acquisition process includes defining attributes of a good target, identifying potential targets, estimating a target s value in the marketplace, preparing a confidentiality agreement or non-disclosure agreement, preparing a due diligence data request list, preparing a letter of intent, and comprehending critical elements of the stock/asset purchase agreement. It is the course main objective to help students to understand the private transaction from both the seller/capital seekers and the investors point of view. This course will be a challenge: Many of the topics and sub-topics will be taught with the expectation that students are familiar with basic financial body of knowledge and basic accounting principles. Strategy, valuation and negotiation methods are three of the most important core of the course. The course will be highly participative and focus on thinking, understanding, analyzing, and presenting findings and conclusions based on developing analytical skills for use in a multitude of corporate and personal business acquisition settings. Although the course will focus on business acquisition, it will also touch on much relevant information on the workings of the private capital markets and the typical investors. Typical Class Schedule Typical class schedule will consist of review of previous class, open discussion of current events (when applicable), discussion of the current week s assignment, introduction of new materials and hopefully, we head home on time. It is my goal to consider both endogenous and exogenous variables for our study course Textbook Readings Some of the topics covered in the class will be new to many students and I will be speaking mostly based on my experience in the industry. The course concentrates on current events and practical body of knowledge to help students to gain practical understanding of the private capital market and business acquisition processes. While most of the course will be based on the practical application of the subject, I am recommending students to use these textbooks for their reference: Valuation: Measuring and Managing the Value of Companies. Third Edition by Copeland, Koller and Murrin (McKinsey & Co.), John Wiley & Sons, 2000; Valuation for M&A by Evans & Bishop, John Wiley & Sons, 2001; Deal Terms by Alex Wilmering, Aspatore Books, 2005 Recommended Periodicals The New York Times, Business Section (online: Wall Street Journal, (online: Barron s, Dow Jones & Company, weekly The Economist, weekly Page 2 of 10

3 Other Resources Books: Websites: The Interpretation of Financial Statements: The Classic 1937 Edition by Benjamin Graham and Spencer B. Meredith, Harper & Row, 1937, First Harper Business edition, 1998; The Essays of Warren Buffett: Lessons for Corporate America by Warren Buffett, selected, arranged and introduced by Lawrence A. Cunningham, 1st Rev and 2001; Security Analysis: The Classic rd Edition by Benjamin Graham and David Dodd, McGraw-Hill 1951; Wall Street Journal: Guide to Understanding Money & Investing by Kenneth M. Morris and Virginia B. Morris, Lightbulb Press 2004; A Modern Approach to Graham & Dodd Investing by Thomas P. Au, John Wiley & Sons 2004; Irrational Exuberance, Robert J. Shiller, Princeton University Press 2000; A Short History of Financial Euphoria, John Kenneth Galbraith, 1990, available in paperback; Barbarians at the Gates, Burrough and Helyar, Harper Publishing, 2003; Cold Steel, Bouquet & Oussey, Little Brown, 2008 National Bureau of Economic Research ( Economy.com ( Morningstar, Inc. ( The Federal Reserve Board Statistics ( Federal Reserve Bank of St. Louis: Economic Research ( Standard and Poors (www2.standardandpoors.com) New York Stock Exchange ( National Association of Securities Dealers ( Securities Exchange Commission ( SEC Edgar Database of Financial Filings ( Value Engine ( Text, Readings, Cases, etc. Participation in this course assumes some modicum of accounting, financial statement analysis, investment theory, and capital markets understanding. The student is expected to read, comprehend, and retain each week s reading assignments. Page 3 of 10

4 Midterm, Final and Other Forms of Feedback The midterm is a short 20-question essay test on July 28 th. The test will measure your understanding of the current economic condition, the private capital market, fundamental process and valuation of acquisition transaction and key elements of a successful transaction. On the final day of class (September 8 th ), the student will present a case study presented at the beginning of the course in a group setting. The presentation will account for 45% of the overall course grade. The class will be separated into 2 groups. The first group will represent a seller and the second group will represent a buyer. The Seller group should be able to present a credible argument on the prospect of their company along with all the necessary information to make their case attractive and their decision to accept/reject the buyer s offer. The buyer group will present their decision by displaying their decision making process and the logic behind the decision. Each group must start with the presentation of their case followed with their decision using power point presentation. Each group must present the reasoning behind their decision that is based on their field research and findings. Grading The final grade (0-100) is composed of the abovementioned components. The approximate point allocations follow: Midterm: 35% Final Project: 45% Participation: 25% Total Grade: 100% By design, the course can t really accommodate precise calculations. Assuming for the moment that the class is balanced, attends and participates regularly, a student who gets a total of points will receive an A points will receive a B points will receive a C points will receive a D Below 65 points will fail. Final Thoughts The instructor is really big on language and communication skills. There are no degrees of uniqueness. State facts, not superlatives, differentiate opinions from factual data and make sound judgment on the findings. Page 4 of 10

5 Disclosures Please note: Incompletes ALL COURSE GRADES ARE FINAL. The interim grade Incomplete may be assigned when a student s work is of passing quality, but a small portion of the course requirements is incomplete for good cause (e.g., illness or other serious problem). It is the student s responsibility to discuss with the instructor the possibility of receiving an I grade as opposed to a non-passing grade. The student is entitled to replace this grade by a passing grade and to receive unit credit provided they complete the remaining coursework satisfactorily, under the supervision of and in a time frame determined by the instructor in charge, but in no case later than the end of the next academic quarter. At that time, the Registrar will cause all remaining Incompletes to lapse to the grade F. Note: Receiving an I does not entitle a student to retake all or any part of the course at a later date. If you have any questions regarding the instructor s grading policy, please raise any such questions immediately. Page 5 of 10

6 Session Planning I. June 23 - Introduction a. Introduction b. Course goal: To have students learn about the private capital market, especially the business acquisition process. i. Have educated opinion on private capital transaction ii. Able to analyze and value acquisition transaction iii. Understand factors/elements needed to successfully complete the transaction iv. Opine on relationship between the economy and private capital market v. Obtain tools to get into the industry. c. Current economic condition d. What this course is and is not about e. Private capital market introduction: i. Description of the market ii. Current trends of the market in the overall economy iii. Types of players in the market iv. From the investor s point of view v. From capital seeker s point of view vi. Funding stages vii. Structures of private equity fund f. Role of private capital market g. Sarbanes Oxley review II. June 30 - Acquisition, Where to Begin? a. The fundamental process of acquiring a company b. Know your purpose/underlying strategy c. Acquisition rationale: i. Looking for growth through horizontal acquisitions ii. Grow vertically move up the food chain iii. Personal reasons d. Finding the resources e. Conditional/situational requirements f. Sourcing acquisition target III. July 7 - Brief in Transaction Types and Valuation Methods Page 6 of 10

7 a. Types of transaction: i. Strategic acquisition ii. LBOs iii. Equity investments iv. Exit transaction v. PIPE b. Brief in valuation c. The importance of valuation d. Two of the most significant valuation measures: i. Economic Value Added ii. Synergy e. Comparison: established vs. startup entity f. Types of valuation: i. Fair Value ii. Investment Value g. Three methodologies: i. Bottom up ii. Top Down iii. Comparative iv. Market valuation vs. financial valuation h. Market valuation what to look for? i. Industry valuation what to look for? j. Company valuation what to look for? IV. July 14 - Company Valuation a. Projection and value pricing i. Determine enterprise value (EV) b. Consolidation value c. Time Value of Money or DCF d. *Bonus* Startup valuation e. *Bonus* Merger valuation f. Historically speaking industry averages g. Key non-number areas to focus on: V. July 21 - Recap of the Transaction a. Consideration in the transaction: i. Focus on valuation Page 7 of 10

8 ii. Walking away is an option b. Component of successful transaction: i. Components of successful closing ii. Deal cycle iii. The Price is right iv. Causes for failures c. ISS Case Study VI. July 28 - Mid-Term Exam a. Essay exam 20 questions short answer questionnaires VII. August 4 Midway NDAs, LOIs and Due D a. Understand the purpose for and typical language of NDAs/CAs b. Key elements of a due diligence: i. What s due diligence? ii. Why do we do it? iii. What are we looking for? iv. What kinds of data and documents do we request? v. What do we do with it when it arrives? c. Decision point: i. How much and what do we want to convey to the target? ii. What are the key sections of an LOI or formal expression of interest? iii. Are we obligated to do everything we say or propose in the letter? iv. Are there any nuances in the LOI process I should be aware of? VIII. August 11 - Acquisition Financing, Stock vs. Cash and other payment issues a. Acquisition consideration: cash or stock or both? b. Potential accountings issues c. Internally generated cash; target s cash; assumption of target liabilities d. Paying for the transaction IX. August 18 Term Sheet and Closing a. Term Sheet: i. Components of the offering Page 8 of 10

9 ii. Sample b. What s a Stock (Asset) Purchase Agreement? i. The key sections: Recitals - the whereases and therefores Definitions, definitions, definitions Price and terms Reps and warranties Covenants Conditions precedent to closing Indemnification Termination Miscellaneous Exhibits Schedules c. Anti dilution protecting your interest in the company: i. Types of protection ii. Sample calculation X. August 25 - Integration a. What does integration mean? i. Relations of due diligence to integration ii. The cycle iii. Keys to success iv. Role of integration manager b. Advisory Board i. Purpose ii. The right advisors iii. Responsibilities iv. Compensation v. Conflicts c. TARMAC case study XI. September 1 The Case for Startups, The PE Industry a. The process for a startup/new market integration: i. Market validation steps ii. Fundraising process iii. Exit strategies b. PE industry i. Prevailing trends Page 9 of 10

10 ii. The future of the industry iii. How to get into the industry and build a career XII. September 8 - Final Project Due; Course Wrap-up a. Recap of previous discussion b. Final Presentation CAS Paint Co. Page 10 of 10