FINANCE 455 / LAW 324 - Corporate Restructuring

The course begins with a brief review of techniques that are used to evaluate the financial implications of restructuring transactions and an introduction to key legal principals. The course will then turn to the structure of the large-scale, public corporation. We will discuss the market forces and legal rules that are designed to facilitate restructurings, as well as resolve potential conflicts of interest between corporate managers and stockholders. The course will then discuss the theoretical rationale for each of these transactions and examine their effects on the welfare of managers, stockholders and other corporate stakeholders. The role of hostile takeovers will be discussed, as well as the uses and abuses of defensive tactics such as share repurchases, poison pills, golden parachutes, etc. The course will review the empirical evidence regarding the effects of such defensive tactics on stockholder wealth.

One common theme that runs throughout the course is identifying the legal precedents that affect restructurings. The state and federal laws and judicial decisions that govern restructuring transactions will be examined, as well as how this set of regulations affects the various corporate stakeholder groups. The course will examine leveraged transactions and determines what role they play in the restructuring process. The course finishes with an examination of current bankruptcy laws and their efficiency in allocating the resources of financially distressed firms through the liquidation / reorganization decision.

After covering the relevant concepts, institutional and regulatory settings, and empirical evidence of each transaction type, students analyze, in detail, real-world cases that are designed to highlight the important aspects of various transaction types. Students are expected to do fundamental analysis of the relatively complicated corporate transactions involving aspects of financial economics, financial accounting, corporate strategy, and corporate law. The legal / institutional environment at the time of the case should be a part of this analysis.

This course is team taught. John Graham is Professor of Finance at the Fuqua School of Business, Duke University. Ray Groth is an Adjunct Professor of Business Administration at The Fuqua School of Business and a Visiting Scholar at Duke's Global Capital Markets Center. Ray is a lawyer and investment banker who has been actively associated with the M&A process in the United States for thirty years, and in fact was involved in some of the cases covered in the class. He is a graduate of the Yale Law School. More detailed descriptions of the instructors are listed at the end.

There are six TAs associated with the course, with each TA being responsible for two cases. Prior to each case, the TAs will conduct "office hours"; in order to be available to help you on each of two days preceding the case due date. See the class calendar (separate handout) for details. The TAs will place a sign-up sheet on the bulletin board in between Seminar Rooms C and D (2nd floor, East building). Students should sign up, indicating where they can be found. The TAs will walk around and help students in the order they have signed up on the sheet.

Structure of the Course

The course is structured around eight or nine case studies. Each has been selected to illustrate a particular type of restructuring transaction. Classes will consist of lectures and student presentations of cases.

There will also be several guest speakers:
April 3: Tom Wurtz, CFO Wachovia Bank (8 am section will need to attend the second half of one of the other sections to hear Mr. Kelly)
April 5: David Hauser, CFO Duke Energy (1:30 to 2:45)
April 18 (Tuesday, 10:30 am, Geneen Auditorium): Symposium on International M&A
Guest speakers are John Bick (international M&A/Private Equity lawyer, partner at Davis Polk); John Fowler (Vice Chairman, Deutsche Bank Securities; head of European health care); and John Pfeffer (Member (i.e., General Partner) KKR London). NOTE: Even though this is not a normal class day, we expect you to attend. A question or questions on the final exam will be based on comments made at this symposium.

Note also, that Ray's experience in the industry effectively makes him a full-time guest speaker.

Students should work in case groups of five or six (minimum is five, six is preferred). To insure diversity, it is highly desirable that no group consists exclusively of 1st-year MBAs, 2nd-year MBAs, or Law Students. All 1st-year students enrolled in the course should have practical experience in valuing companies. It is desirable for every team to have one or two Law School students. Each group is required turn in five case write-ups.

Each group is required turn in assignments for Time, Xerox, and the Proxy questions, and to write one-page memos for two out of the three cases for which they do not write case reports. (Note, this means that you there will be one case for which you are not required to turn in anything.) Finally, each group will be required to make a classroom presentation of one of their case reports. The cases and due dates are listed on the next page.

To ensure that every case is prepared by half the class, we will divide the class into odd and even groups. We will try to assign you to odd or even based on the case you are asked to present. The assignments for the cases are indicated on the next page. We will decide which of the case reports each group will present in class once we see the composition and number of groups in each section.

Even though most of the work is done in teams, we expect you to understand the material that is submitted with your name on it. We want each person to participate on each case. You might have to "study" materials prepared by other group members. For example, if a different group member develops a spreadsheet that your group uses, we expect you to be familiar with the spreadsheet and able to answer questions.

Prior to turning in the case, it is a violation of the honor code to discuss the case with anyone other than your group members or to access solutions from any source. Likewise, you should not discuss the case with anyone in another group if his/her group has not turned in the case.

Your performance in this course will be based on a total of 300 points, broken down as follows: the five reports and the one in-class presentation will be evaluated on a 20-point scale each, and memos on a ten-point scale each.

Your individual grade in this course is based on the relative performance of your group and your contribution to the "effort" as assessed by the members of your team. At the end of the term we will hand out evaluation forms. They will instruct you to allocate points to each of your team members including yourself, where the total number of points for the group add up to 100. For example, if there are four members in your group, and one person does twice as much work as anyone else, your should assign points of 20, 20, 20, and 40 to your team. Note: you also assign points to yourself. These individual valuations are the basis for the ratngs by teammates; part of the individual grades and will assume more importance in borderline cases. Individuals receiving "extreme" averages may have their grade moved up or down, as we deem appropriate.

The instructors will assign the class participation scores, ranging from 0, 5 (attended class but never talked), 10, 15 (attended almost every class and regularly made helpful comments), 20, and 25 (attended every class and made frequent helpful comments).

There will a 135 minute in-class final exam on Thursday April 27. The bulk of the final exam will be related to a short case study that we will ask you to analyze. There will also be at least one question based on comments made by guest speakers (April 3rd and April 18th).

We expect you to attend every class session. Please be on time at the start of class, and also after the break. If you have to miss class, please contact Prof. Graham in advance with an explanation of your absence. Unexcused absences may result in extra solo projects being assigned to the student.

On two Tuesdays (March 28 and April 11), we invite you to have lunch with your professors. BYOL (bring your own lunch). The idea is to allow us to informally get to know you better and vice versa, and to allow us to keep tabs on student progress in the course.

Schedule for Turning in Assignments:

Note: Each group turns in five cases, and memos for Time, Proxy Qs, and Xerox. In addition, each group chooses which two out of the three remaining memos to turn in.

Proxy Questions
Each group will turn in an assignment answering questions about a proxy statement that can be found on the Internet. The questions appear in the coursepak. This assignment is designed to expose students to institutional detail and to provide some context for some of the topics discussed in class.

Guidelines for Reports
For each case you will be provided with a list of questions designed to help guide and focus your analysis. The questions are not intended to be a complete list of the relevant issues in the case and, therefore, should not limit your analysis. The following are some general suggestions in preparing your reports:

Determine the major problems and/or opportunities in the case. Critically evaluate the information provided in the case.

Having identified the relevant issues, list the alternative courses of action. If needed, consult general texts and references pertinent to the problem. If business conditions, the legal environment or other events at the date of the case affect the solution, find the appropriate facts. Critically evaluate the statistical data and legal issues provided in the case. Confine your analysis to facts known at the time of the case. Do not incorporate events and facts that occurred subsequently.

Analyze and evaluate the alternatives, considering both the strengths and weakness of each and their relation to the firm"s strategy, its environment and its competitive situation.

Determine a specific recommendation and fully develop the logic supporting it. In general, this is the most important phase of your analysis. Consequently, it will be the aspect of your report that we will focus on primarily.

Reports can be no longer than five pages, including a one-page Executive Summary, printed in 12-point type, double-spaced with 1-inch margins. The Executive Summary should contain the definition of the problem and the final recommendation. All supporting documents (spread sheets, analyses, tables, etc.) should be included as an appendix and will not be counted against the page limitations. The first page of the appendix should contain ALL of your assumptions regarding your valuation.

NOTE: the quality and clarity of your writing counts in your case write-up grade.

Memos should be no longer than one page printed in 12-point type, double-spaced with 1-inch margins. State the problem at hand and sketch out how you would go about solving it. You can turn in more than this but it is not required.

Each group will be responsible for an oral presentation of one case. All oral presentations should be supported by any necessary aids such as handouts or overheads. Please bring at least two hardcopies of your presentation, one for John and one for Ray. Be advised that students cannot read Excel spreadsheets in 10-point type from the in-class computer.

You may find it useful to prepare a PowerPoint presentation. If you intend to use the AV equipment in the classroom, it is your responsibility to make sure it is in working order before the class begins. Ideally, you should load your file onto the classroom computer before the class period begins. If you choose to access the student G: drive, it can be accessed on the classroom computer at \\galaxy\mba$ .

Oral presentations should be no more than 20 minutes. Violation of the 20-minute constraint (unless interrupted by questions) will be viewed negatively, so plan accordingly. Grading will be based on both the quality of the analysis and the quality of the presentation. You are expected to provide a well-prepared and polished presentation so that you do not waste the time of your classmates. You should discuss pertinent background or industry information but, to save time, please keep this discussion minimal. It is advisable that you limit the number of speakers to one or two individuals in order to minimize presentation time.

Note: even though your time is limited, do not gloss over the numbers. Ideally, you should present the key numerical results and explain how you got them.
Note: Be prepared to handle questions from your classmates and professors.

Please read the lecture notes before class and bring them to class. We will not have additional copies. A recommended (not required) text for this course is Valuation: Measuring and Managing the Value of Companies, 4th Edition by McKinsey & Company, Inc., 2005, Tim Koller, Marc Goedhart, and David Wessels (available on Amazon.com). Another excellent text is Takeovers, Restructuring, and Corporate Governance, Pearson, 2004, by Weston, Mitchell, and Mulherin.

Please note that the course schedule is very full. There are some written lecture slides that we will cover less thoroughly, if at all.