Corporate Finance 3: Creating Value Through Corporate Restructuring | Lecture notes Corporate Finance

CORPORATE FINANCE 3 (FIN 7213)

CREATING VALUE THROUGH CORPORATE RESTRUCTURING (CVCR)

SYLLABUS

Masters of Business Administration Program

Max M. Fisher College of Business

The Ohio State University

Professor Karen H. Wruck

Spring 2017, Term 1 — Updated: January 4, 2017

Course Objective and Content:

This course is intended for students who are interested in careers in corporate finance, investment banking,

consulting, or who aspire to lead an organization at some point in their careers and therefore will require a

command of corporate finance from both a strategic and operating point of view.

Corporate restructuring is a surprisingly common event that typically affects every party involved with a firm:

employees, all classes of investors, suppliers, and customers. In addition, professionals such as consultants,

investment bankers and other financial advisors, accountants and attorneys are often engaged as part of the

restructuring process. The process itself is challenging, complex and expensive. The strategic business and

organizational problems being address are substantial with the potential value for significant value to be created or

destroyed.

A firm facing a decision to restructure, or that is being forced to restructure, generally faces major “gap” between its

potential and current value. This “value gap” can be the result of poor management, bad capital structure

decisions, shifts in technology or the competitive landscape, macroeconomic shocks or market inefficiencies.

Whatever, the reason, the firm finds itself in a situation in which it is highly unlikely that the status quo will be

economically sustainable.

This course begins with the premise that a firm is a nexus of contracts, both explicit and implicit. The firm faces

restructuring because its current contracts are not viable. Restructuring, therefore, is a renegotiation of existing

contracts and can best be viewed as a major re-contracting event. The process of creating (or possibly destroying)

value through re-contracting is the focus of this course.

The approach taken to analyzing and solving problems in this course is one of applied financial economics.

Throughout the course we will study tools of financial analysis and apply them to important problems. However,

when traditional financial economics does not adequately address a topic that is important to our understanding,

we will move beyond its boundaries. The course material stresses the importance of theory in solving problems,

and combines theory development with both examples and case analyses that illuminate and challenge the theory.

The course material is cumulative, making it important to keep up with the readings and case analyses, to pay

close attention to class discussions, and to keep good notes. Failure to do this often leaves students lost and

confused. I strongly recommend that you review the course materials and your course notes regularly.

Readings, cases, articles, discussion questions and study questions will form the basis of class discussions.

Typically, students comprehend much of the textbook/book chapter material without substantial lecturing by the

instructor. Thus, while there will be some lectures on the more important and/or difficult material, most of our class

time will be spent applying the theory and concepts to problems through open, interactive classroom discussion.

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CORPORATE FINANCE 3 (FIN 7213 )

CREATING VALUE THROUGH CORPORATE RESTRUCTURING (CVCR)

SYLLABUS

Masters of Business Administration Program Max M. Fisher College of Business The Ohio State University Professor Karen H. Wruck Spring 201 7 , Term 1 — Updated: January 4, 201 7 Course Objective and Content: This course is intended for students who are interested in careers in corporate finance, investment banking, consulting, or who aspire to lead an organization at some point in their careers and therefore will require a command of corporate finance from both a strategic and operating point of view. Corporate restructuring is a surprisingly common event that typically affects every party involved with a firm: employees, all classes of investors, suppliers, and customers. In addition, professionals such as consultants, investment bankers and other financial advisors, accountants and attorneys are often engaged as part of the restructuring process. The process itself is challenging, complex and expensive. The strategic business and organizational problems being address are substantial with the potential value for significant value to be created or destroyed. A firm facing a decision to restructure, or that is being forced to restructure, generally faces major “gap” between its potential and current value. This “value gap” can be the result of poor management, bad capital structure decisions, shifts in technology or the competitive landscape, macroeconomic shocks or market inefficiencies. Whatever, the reason, the firm finds itself in a situation in which it is highly unlikely that the status quo will be economically sustainable. This course begins with the premise that a firm is a nexus of contracts, both explicit and implicit. The firm faces restructuring because its current contracts are not viable. Restructuring, therefore, is a renegotiation of existing contracts and can best be viewed as a major re-contracting event. The process of creating (or possibly destroying) value through re-contracting is the focus of this course. The approach taken to analyzing and solving problems in this course is one of applied financial economics. Throughout the course we will study tools of financial analysis and apply them to important problems. However, when traditional financial economics does not adequately address a topic that is important to our understanding, we will move beyond its boundaries. The course material stresses the importance of theory in solving problems, and combines theory development with both examples and case analyses that illuminate and challenge the theory. The course material is cumulative, making it important to keep up with the readings and case analyses, to pay close attention to class discussions, and to keep good notes. Failure to do this often leaves students lost and confused. I strongly recommend that you review the course materials and your course notes regularly. Readings, cases, articles, discussion questions and study questions will form the basis of class discussions. Typically, students comprehend much of the textbook/book chapter material without substantial lecturing by the instructor. Thus, while there will be some lectures on the more important and/or difficult material, most of our class time will be spent applying the theory and concepts to problems through open, interactive classroom discussion.

FISHER COLLEGE OF BUSINESS, THE OHIO STATE UNIVERSITY Each session’s assignment is contained in a pdf file in the content area of the Carmen web site. Each file contains the reading assignment and a set of discussion and sometimes study questions. You should read the assignment sheet both before and after reading the assigned materials. Past students have found this to be a useful way to focus their thoughts and prepare for class. Generally, there is an individual homework assignment due prior to the start of each class session. Session homeworks can be found on the Carmen web site and are typically either a link to a homework form that can be filled out on line and submitted prior to the beginning of class or a file that can be downloaded and filled out and turned in by the student at the beginning of class. This course is divided into three modules as follows: Module 1: Fundamentals of Creating Value through Restructuring ( 3 sessions) Module 2: Restructuring and Debt Financing ( 3 sessions) Module 3: Strategies for Managing Financial Distress ( 4 sessions) Module 4: Valuation in the Face of Financial Crisis and Market Bubbles (3 sessions) Details of the topics and readings for each session within a module can be found in the Reading List document (also on Carmen). It is difficult to predict exactly how long it will take to cover each of the topics so we may reschedule some sessions as the course progresses. Also, I may be handing out additional material such as problems, notes, topical articles and examples when appropriate. Course Materials:

Course packages (cases and readings), available in digital form (links provided in news section of Carmen course site).
Corporate Finance , Berk and DeMarzo, Second or Third Edition, Prentice Hall (this is the textbook for your core finance class, it will be an important review and background reference text for this course).
Supplemental readings to be posted on Carmen and/or handed out in class.
The Wall Street Journal or Financial Times. You should read the WSJ or FT regularly to reinforce the applicability of the issues we study. Course Approach: This course is intended to be discussion-oriented and interactive. To gain the knowledge base offered by this course you must come to class fully prepared each day. Full preparation means that you have read the materials carefully and conducted the relevant financial analysis in detail. Further, you should be prepared to make a recommendation for the decision at hand and be able to support your recommendation with data and analysis. If you are unwilling to make a commitment to preparation at a high level and consistently follow through on it throughout the entire term, then DO NOT TAKE THIS CLASS. Without a commitment to full preparation your enrollment in this class will constitute a waste of everyone’s time. Standards of Integrity and Conduct: Each student in this course is expected to be familiar with and abide by the principles and standards set forth in The Ohio State University’s code of student conduct and code of academic conduct. You can view these documents or download pdf versions at: http://studentaffairs.osu.edu/resource_csc.asp and http://www.gradsch.osu.edu/Content.aspx?Content=10&itemid=1.

FISHER COLLEGE OF BUSINESS, THE OHIO STATE UNIVERSITY which you have entered formulas, have notes and computations, etc. The point is for you to learn to do the analyses yourself.) Final Exam ( N—during exam period, time limit, individual no collaboration allowed ) 25 % Class participation ( Individual contributions to class discussion ) 25 % More detail on grading is provided below. Written case analysis/project: You will be asked to form 3 to 4 person teams for a case analysis/project by end of the first week of class. If necessary, I will assign students to groups already formed, starting with the smallest groups. I expect that the receiving group will welcome the additional student(s) unconditionally. An assignment sheet will be distributed at a reasonable time in advance of the first due date. Associated written reports should contain the items and analyses required and follow the formatting parameters exactly as explained in the assignment sheet. Each violation of the rules, e.g., each page over the limit, the use of a cover page when it is explicitly stated not to use a cover page, less than 1.5 line spacing when 1.5 line spacing is required, font size smaller than permitted, and so forth, will cost your group 10% of the total points allocated to that assignment (limited liability does not apply). To help address any free-rider issues that might arise in the context of teamwork, each team member will be asked to assess the contribution of his or her peers to the project. Should a substantive free-riding problem be identified, the free-rider’s score will be accordingly discounted to reflect his or her lack of effort and contribution. Deliverables associated with written case analyses/projects are due at the beginning of class on the due date. You will be required to turn in a hardcopy at the beginning of class and, assuming the instructor can provide you with access, to upload an electronic copy to Turn-It-In prior to the start of class. Be sure to bring an extra hard copy to refer to in class discussion. No late papers will be accepted, nor will e-mailed or faxed papers. Finally, written reports will be graded for presentation, writing and grammar as well as content. They must meet the standards that would be required in a professional work context. Homework: Your performance on homework will constitute 25% of your grade. For the vast majority of sessions, there will be a required homework. Typically, it will involve reporting the findings of your analysis in an online form on the Carmen course website. You must enter your answers prior to the start of class. Your answer to each homework will be scored between 1 and 5 as follows: 5 for a strong answer, 4 for a good answer, 3 for an average answer, 2 for an okay answer, 1 for a poor answer and 0 for no answer or a completely off-base answer. Final Exam: The final exam will be short answer and problem solving and will be held during the final exam period for the term. Your final exam will constitute 25% of your grade. No collaboration of any kind is allowed on the final exam. Detailed instructions will be provided at the time of the exam and it is expected that you follow these instruction in detail. Class Participation: The final 25% of the course grade is awarded for class participation. This grade will reflect both my assessment of the quantity and quality of your contribution to the classroom discussion and your peers’ assessment. To facilitate grading for class participation you should choose a seat for the entire term early in the term. You should also use your nameplate in every class. You should be prepared for cold calling in all class meetings.

FISHER COLLEGE OF BUSINESS, THE OHIO STATE UNIVERSITY Regular attendance and class participation are necessary, but not sufficient, for a student to receive one of the higher letter grades in this class. You should realize that the points awarded for class participation are sufficient to cost you a letter grade or more should you choose not to participate fully and regularly. Disability Policy: Students with disabilities or requiring special accommodations should work directly with The Ohio State University Office of Disability Services (ODS). ODS is expert at working with individual students to provide the appropriate accommodations. ODS is located in 150 Pomerene Hall, and their phone number is 614- 292 - 3307. Grade Appeal Policy: Grades are intended to reflect the overall quality of performance of the student(s). If you think your grade on an exam or assignment does not reflect the quality of your performance, submit a clear written explanation of your reasoning within one week after the return of your assignment or test. The written document need not be long, but must clearly identify the problem or issue of concern. I will carefully consider all such appeals. There will be no grading appeals after the one-week deadline has passed. Office Appointments: I am available to discuss issues of concern to you on an individual basis either after class or in my office (Fisher 842). Please e-mail to make an appointment for an office visit. So that I can be better prepared for your visit, please give me a general idea of the topic you’d like to discuss. I typically schedule 15 minute appointments; if you believe you will require more time, please request a longer appointment.

CORPORATE FINANCE 3 (FIN 7213)

CREATING VALUE THROUGH CORPORATE RESTRUCTURING (CVCR)

READING LIST

Masters of Business Administration Program

Max M. Fisher College of Business

The Ohio State University

Professor Karen H. Wruck

Spring 2017, Term 1—Updated: January 4 , 2017

Review

Materials

Materials for Review, Reference and Pre-Course Preparation

• Chapter 18, “Capital Budgeting and Valuation with Leverage,”

Corporate Finance , Berk and DeMarzo, Second or Third Edition,

Prentice Hall, (skim, review, you should have this book from

core finance).

• Chapter 19, “Valuation and Financial Modeling: A Case Study,”

Corporate Finance , Berk and DeMarzo, Second or Third Edition,

Prentice Hall, (skim, review).

• Equity Valuation, Linda DeAngelo, Marshall School, University

of Southern California, Unpublished White Paper (on Carmen).

• Valuing Distressed and Declining Companies, Aswath

Damodaran, Stern School of Business, New York University,

Unpublished White Paper (on Carmen).

• Alternative Assumptions Underlying Various Approaches to

Unlevering/Levering Betas, Memo to Finance Students,

Karen Hopper Wruck (on Carmen).

• Alternative Discounted Cash Flow Enterprise Valuation Methods

Summary Sheet, Memo to Finance Students,

Karen Hopper Wruck (on Carmen).

• Terminal Value Math for Growing Perpetuity in DCF Valuations,

Memo to Finance Students, Karen Hopper Wruck (on Carmen).

FISHER COLLEGE OF BUSINESS, THE OHIO STATE UNIVERSITY

MODULE 1: FUNDAMENTALS OF CREATING VALUE THROUGH RESTRUCTURING

Sessions

1 and 2

Creating Value through Corporate Restructuring: An Introduction

• “The Case for Managing by the Numbers,” Harold Geneen, Fortune,

October 1, 1984, pp. 78-81.

• “Lessons from a Middle Market LBO: The Case of O.M. Scott,” George P.

Baker and Karen H. Wruck, Journal of Applied Corporate Finance.

• Diagram: Conglomerate versus LBO Organizational Forms.

• “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership

Structure,” Michael C. Jensen and William H. Meckling, Journal of

Financial Economics , 1976.

• Background (not required): Berk and DeMarzo, Chapter 15, interview with

Bain Capital principle, p. 528 in 3rd^ edition; Chapter 23, section 23.1 on

private equity.

Session

Voluntary Restructuring through Leveraged Recapitalizations

• “Financial Policy as a Catalyst for Organizational Change: Sealed Air

Corporation’s Leveraged Special Dividend,” Karen H. Wruck, Journal of

Applied Corporate Finance.

• “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,”

Michael C. Jensen, American Economic Review , May 1986, Vol. 76, No. 2,

pp. 323-329.

• Background (not required): Berk and DeMarzo Background (not required):

Chapter 14, section 14.2 Modigliani-Miller I: Leverage, Arbitrage and Firm

Value, section 14.3 Modigliani-Miller II: Leverage, Risk and the Cost of

Capital.

Session

Voluntary Restructuring through Spin-Offs

• “Cytec Industries’ Spin-Off (A): Sink or Swim?” Karen H. Wruck and Sherry

P. Roper, Harvard Business School Case 897-053.

• “Restructuring Top Management: Evidence from Corporate Spinoffs,” Eric

G. Wruck and Karen H. Wruck, Journal of Labor Economics 2002, Vol. 20,

S176-S218, read S176-180 and S184-187 only.

• Background (not required): Berk and DeMarzo, Chapter 17, section 17.

Stock Dividends, Splits and Spin-Offs.

FISHER COLLEGE OF BUSINESS, THE OHIO STATE UNIVERSITY

Corporate Finance 3: Creating Value Through Corporate Restructuring, Lecture notes of Corporate Finance

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Partial preview of the text

Download Corporate Finance 3: Creating Value Through Corporate Restructuring and more Lecture notes Corporate Finance in PDF only on Docsity!

CORPORATE FINANCE 3 (FIN 7213 )

CREATING VALUE THROUGH CORPORATE RESTRUCTURING (CVCR)

SYLLABUS

CORPORATE FINANCE 3 (FIN 7213)

CREATING VALUE THROUGH CORPORATE RESTRUCTURING (CVCR)

READING LIST

Masters of Business Administration Program

Max M. Fisher College of Business

The Ohio State University

Professor Karen H. Wruck

Spring 2017, Term 1—Updated: January 4 , 2017

Review

Materials

Materials for Review, Reference and Pre-Course Preparation

• Chapter 18, “Capital Budgeting and Valuation with Leverage,”

Corporate Finance , Berk and DeMarzo, Second or Third Edition,

Prentice Hall, (skim, review, you should have this book from

core finance).

• Chapter 19, “Valuation and Financial Modeling: A Case Study,”

Corporate Finance , Berk and DeMarzo, Second or Third Edition,

Prentice Hall, (skim, review).

• Equity Valuation, Linda DeAngelo, Marshall School, University

of Southern California, Unpublished White Paper (on Carmen).

• Valuing Distressed and Declining Companies, Aswath

Damodaran, Stern School of Business, New York University,

Unpublished White Paper (on Carmen).

• Alternative Assumptions Underlying Various Approaches to

Unlevering/Levering Betas, Memo to Finance Students,

Karen Hopper Wruck (on Carmen).

• Alternative Discounted Cash Flow Enterprise Valuation Methods

Summary Sheet, Memo to Finance Students,

Karen Hopper Wruck (on Carmen).

• Terminal Value Math for Growing Perpetuity in DCF Valuations,

Memo to Finance Students, Karen Hopper Wruck (on Carmen).

MODULE 1: FUNDAMENTALS OF CREATING VALUE THROUGH RESTRUCTURING

Sessions

1 and 2

Creating Value through Corporate Restructuring: An Introduction

• “The Case for Managing by the Numbers,” Harold Geneen, Fortune,

October 1, 1984, pp. 78-81.

• “Lessons from a Middle Market LBO: The Case of O.M. Scott,” George P.

Baker and Karen H. Wruck, Journal of Applied Corporate Finance.

• Diagram: Conglomerate versus LBO Organizational Forms.

• “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership

Structure,” Michael C. Jensen and William H. Meckling, Journal of

Financial Economics , 1976.

• Background (not required): Berk and DeMarzo, Chapter 15, interview with

Bain Capital principle, p. 528 in 3rd^ edition; Chapter 23, section 23.1 on

private equity.

Session

Voluntary Restructuring through Leveraged Recapitalizations

• “Financial Policy as a Catalyst for Organizational Change: Sealed Air

Corporation’s Leveraged Special Dividend,” Karen H. Wruck, Journal of

Applied Corporate Finance.

• “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,”

Michael C. Jensen, American Economic Review , May 1986, Vol. 76, No. 2,

pp. 323-329.

• Background (not required): Berk and DeMarzo Background (not required):

Chapter 14, section 14.2 Modigliani-Miller I: Leverage, Arbitrage and Firm

Value, section 14.3 Modigliani-Miller II: Leverage, Risk and the Cost of

Capital.

Session

Voluntary Restructuring through Spin-Offs

• “Cytec Industries’ Spin-Off (A): Sink or Swim?” Karen H. Wruck and Sherry

P. Roper, Harvard Business School Case 897-053.

• “Restructuring Top Management: Evidence from Corporate Spinoffs,” Eric

G. Wruck and Karen H. Wruck, Journal of Labor Economics 2002, Vol. 20,

S176-S218, read S176-180 and S184-187 only.

• Background (not required): Berk and DeMarzo, Chapter 17, section 17.

Stock Dividends, Splits and Spin-Offs.

Session

Chapter 11 Reorganization and Vulture Investing

• Bankruptcy and Restructuring at Marvel Entertainment Group, Benjamin C.

Esty and Jason Auerbach, HBS Case 298-059.

• Investing in Distressed Situations: A Market Survey, Financial Analysts

Journal , November/December 1995, 8-27, Stuart C. Gilson (on Carmen).