You feel the question taking shape in the opening lecture of Robert Holthausen’s “Mergers and Acquisitions” class. As the Wharton professor recounts the problems with deal-making today, ticking off two dozen reasons why mergers fail — from valuation errors to culture clashes — the discouraging statistics fly by on the screen behind him. McKinsey says 74 percent of deals fail to create shareholder value; KPMG says it’s 83 percent. At last, the inevitable hand shoots up in front: “Is this going to be a class about why we shouldn’t acquire anybody?”
The professor is ready; he’s heard it before. “No. We’re going to talk about how to improve your probability for success,” he responds. But then another hand is raised, with a question not so easily answered: “Is there any correlation between those successes and the people who’ve taken this class?”
The queries capture two essential concerns on the minds of the 60 attendees here at the University of Pennsylvania’s impressive Aresty Institute complex, where they are about to navigate an intensive week of study. Are acquisitions the way to go, if they so often seem to destroy value? And if companies do pursue M&A, can a class help them learn to do it right?
With their checkbooks, corporations are guardedly voting that the answer to both those concerns is yes. Despite the sharp slide in acquisitions last year, 7,500 deals were done in the United States, totaling $819 billion, about half the world’s M&A volume. And across America, 1,200 executives will be sent by their employers to “open enrollment” university classes like this one, about the same as last year’s attendance.
“We support this type of development activity,” says Carol Ritchie, a director of finance for Pfizer Inc.’s consumer health-care division, which sent a senior manager, John Schumacher, to attend this Wharton M&A class. “John came back with some tools that he wants to put into place,” including new valuation methods that could allow the Pfizer unit to price riskier deals more effectively.
Wharton is one of seven schools — the others are the University of California, Los Angeles; the University of Chicago; Duke University; Northwestern University; Stanford University; and the University of Virginia — to offer weeklong sessions. Shorter courses are available at Columbia University, Harvard Business School, the University of Michigan, the California Institute of Technology, and elsewhere.
Programs usually bear both the school’s stamp and the stamp of the professor in charge. (Indeed, teachers often take their courses quite personally, and may toss darts at the approaches of competing universities.)
Margaret Neale, an organizational behaviorist and expert in negotiations, will lead Stanford’s first weeklong M&A program in August, for example, using her own negotiating model and taking the program deeper than most into the area of merger-related human-resource management. “The best assets in an acquisition can just walk after the deal,” she says, so her class will “leverage what we know about why that is,” to help participants retain acquired talent.
The course at UCLA’s Anderson School oozes historical perspective. Prof. J. Fred Weston, 86, started studying mergers in 1948, before the first wave of conglomerates and before today’s dominant net-present-value cash-flow valuation models were created. Through the decades, he says, the reasons behind M&A disasters haven’t changed much, even if the finance tools for preventing them are better. “The number one reason is that companies pay too much; number two is they underestimate the problems of integration; number three, people don’t have enough experience when they start,” says Weston. “It’s an area where you have to have done it to do it well.”
Help from Monte Carlo
The chance for companies to let staffers gain experience in a controlled classroom environment has kept M&A courses among academe’s healthier programs, even as slashed training budgets cut executive-education revenues in general by about 15 percent last year. In 2001, U.S. schools still attracted roughly 40,000 participants to open-enrollment classes, billing companies more than $200 million in tuition, administrators estimate. The continued popularity of M&A courses leads some schools to compete hard in that field, leveraging their special teaching skills and reputations and stressing any uniqueness in their programs.
For Wharton’s offering — at a cost of $8,250 the nation’s priciest merger week — the course lineup is similar to that in other programs: valuation, strategic assessment, integration, negotiation, due diligence, antitrust and legal perspectives, and case studies. The main attraction, not surprisingly, is the quality of Penn’s faculty members across a range of merger-related disciplines, including finance and accounting, organizational behavior, and law.
The teaching technology is also advanced. In Wharton’s “MegaMicro” case, a simulation modeled on an actual 1997 Honeywell acquisition, participants see how their decisions affect the value of the target. If they keep the target’s sales force intact and spread its leadership capabilities to the combined entity, for example, new valuation data flashes to them, allowing for a slightly higher bid price. Other software lets teams see a Monte Carlo-style process in action, with their merger decisions playing out against various uncertainties.
The course, as designed by Holthausen, a finance professor, and Harbir Singh, a management professor, covers more than 50 hours, starting Sunday afternoon, with appearances by CEO veterans of the merger wars highlighting Thursday and Friday sessions. Negotiation exercises take up 10 evening hours.
As Holthausen suggests on the first morning, any hand-wringing over the collective failure rate for mergers is only fleeting. The pace is rapid-fire and the style is interactive, filled with breakouts designed to encourage teams of finance and nonfinance staffers to establish valuation disciplines, including factors that may not be reflected in the financial statements of the target. “You need to understand what is captured and what is not when you forecast the bottom line,” he tells the class. “If the company is a low-cost provider in the industry, for example, does that show up in its financials?”
Beyond urging participants to run risk-adjusted cash-flow analyses for a range of scenarios, the main message at Wharton is to resist any force, whether a rival bidder or your own CEO, that tempts you to suspend your discipline. The strongest force, says Holthausen, may be internal. “As soon as you fall in love [with a company], you become undisciplined.” Compounding other M&A problems, Singh points out, some companies tie bonus pay to factors unrelated to the cash-flow goals in the deal, thus potentially rewarding value-destroying mergers.
Hey, What about Enron?
The discipline of companies like Cisco Systems and General Electric, which use balanced M&A teams, is especially prized. “But what happens in a lot of other deals is that everything is treated independently,” says Holthausen, a 13-year Wharton veteran: one person works on strategy, another on valuation, and a third on due diligence. Instead, the Wharton class stresses “the interconnectivity of these topics, driven by the strategy.” The best model for this balance of finance and strategy may be the way Holthausen and Singh themselves share the class, occasionally finishing each other’s sentences.
If there’s any flaw, some participants say, it may be an inattention to current events, such as Hewlett-Packard’s Compaq merger, controversy over Tyco International’s merger accounting, Dynegy’s abortive bid to purchase Enron before it filed for bankruptcy — all raging in the headlines during the recent program.
One student, John Tushar, group director for business development at Johnson & Johnson’s Ethicon endo-surgery devices unit, agrees with the general contention but loved the team simulation, even though it was based on a 1997 merger. “That took away the staleness, because it was so real,” he says. The valuation strategies also provided new tools. “Now we’re not as likely to take the P&L they give us,” he says of the targets he examines. “We’re going to run our own model.”
Brian Calvert, a valuation specialist with L.E.K. Consultants who took the Wharton course “to keep up with the latest and greatest thinking,” agrees that more attention to the outside world might have been helpful. In the stock market, “Cisco was dying, and nothing was said about it,” even when a 1990s-vintage Cisco case was used in class. “But on balance, what they accomplished in a week was excellent.”
Holthausen acknowledges a trade-off in using older cases. Newer material would be great, but “most cases are written two or three years after the fact,” he says. And he himself spent six months developing the simulation, time needed to make it a useful tool for analyzing valuation, strategy, and integration decisions.
“Hubris and Empire-Building”
Merger week at Northwestern University’s Kellogg School, which Prof. Artur Raviv describes as “a boot camp for M&A,” tends to ignore the headlines, too. “The purpose of the course is not to be topical; we’re providing tools of analysis,” he says.
While the finance and strategy areas covered resemble Wharton’s, Raviv says he is wary of software-based simulations in his class. “Those are all driven by your assumptions about the correlation of variables,” he says, and a program that shows participants how a decision plays out is “basically a nice toy, but you don’t know what’s cooking inside.”
Kellogg brings in a panel of experts — investment bankers, merger lawyers, and CEOs — as a highlight of the final day. And after analyzing one major case, there’s “a surprise guest speaker who was involved with the deal.” For an executive to appear, it’s essential that the related case be older, because “nobody would come to talk about a recent case,” Raviv adds. (The program is updated often, however. He introduced an antitrust segment just after GE’s Honeywell acquisition was derailed last year, for example.)
South along Lake Michigan, at the University of Chicago Graduate School of Business, Richard Leftwich calls Wharton’s and Kellogg’s programs “formidable competition.” But he conducts things very differently in Chicago’s three-year-old merger course. For one thing, no CEOs are invited to talk about their experiences in M&A.
“Participants don’t want to hear war stories when they come here,” says Leftwich. They want Chicago’s expert take on various merger cases. “Schools get a reputation for certain things, and that’s what Chicago is known for.”
Neither does the basic organization of Chicago’s program seem to allow for quite as much blending of finance and strategy, compared with Wharton’s or Kellogg’s. Chicago gives over day one to strategy and day two to valuation, followed by accounting and tax on Wednesday and negotiations on Thursday. “You figure out the parameters of the deal, what you want to pay, and what the rivals are willing to pay,” says Leftwich; then you want to learn how to bring it off under favorable terms. Chicago sees the chronology leading naturally into integration, which is Friday’s centerpiece.
Even without visits from CEOs, the professor says, Chicago’s program does offer some views of how deals are really done outside the ivy-covered walls: the often dysfunctional pictures painted by the participants themselves. “It’s often a world of hubris and empire-building,” according to Leftwich. “They’re told that companies have to grow by 20 percent a year, and the only way they can is through acquisitions.” And occasionally, the misguided path to that growth is “the reverse engineering of the price they’ve decided to pay.” A case Chicago uses, the battle for Paramount that Viacom won over QVC, presents such an example, with the bidding companies altering their calculations to reflect the incremental rise in bids, the professor says. This helps him illustrate for participants “the minefield of M&A.”
Spinach at Tax Time
The Chicago-style separation of finance and strategy is anathema elsewhere, including at the University of Virginia’s Darden School. Using what Darden professor Jay Bourgeois calls “a marble-cake model,” compared with others’ “layer cake” approaches, the school has its faculty study what others in its program are doing, and lets their presentations intermingle. “Every one of my finance colleagues speaks the strategy language, and vice versa. And if one person is structuring a deal with tax angles and collars for the class, I keep up with what they’re doing,” says Bourgeois, a business administration professor who describes the study of tax considerations as “the spinach in the program.”
Like other schools teaching M&A to executives, Darden believes one week is the maximum companies will accept for a single course. But in a break from tradition, Darden has created a separate four-day “Postmerger Integration” course for this fall. The new program, says Bourgeois, who will teach in both, evolved because graduates wanted more answers about “what’s next” after taking the regular merger week. “We finally put together a program focusing on such things as differing cultures, behavioral issues, and the mechanical parts of combining firms, such as blending payroll, IT systems, and accounting systems.”
The professor expects the postmerger course to be tough. “Where’s the fun in M&A? It’s doing the deal,” he says. “Integrating is hard work, and there’s often no glory from successful integrations.” To engage participants, he’ll introduce role-playing, including “CEOs and CFOs” from the class announcing the deal to analysts. He expects a third of its attendees to come from the earlier Darden class.
The distinguishing characteristic of “Mastering Acquisitions” at Duke’s Fuqua School is an emphasis on merger alternatives — especially strategic alliances. Alliances, says Prof. Arie Lewin, are “a structure by which you can experiment and taste the possibilities” before jumping in. Another watchword of the Duke program: think small. “If you are out to acquire capabilities or technologies that are new to you, you probably don’t want to do that by acquiring a large company,” says Lewin. For companies less concerned about the merger-versus-alliance alternative — or unable to break executives away for a week — Duke also offers a two-day program.
Indeed, the trend toward shorter programs is strong at some schools. The University of Michigan holds its program to just over three days, giving only brief negotiations training and concentrating valuation into an intensive half day. Its object: to stress strategic and cultural elements over finance elements, even though — and perhaps because — an unusually high 80 percent of its attendees are from the finance side of their companies. “Our view is that too much time is spent on the finance piece” in most merger classes, says finance professor Anjan Thakor, who heads the Michigan program. His class opens with a strategy discussion, for example. “If you start out with the numbers,” he says, “they focus on the numbers.”
The Maligned “Chainsaw”
Harvard Business School, opting for a similar three-day schedule, applies its characteristic case-driven format to a course entitled “Corporate Restructuring, Mergers, and Acquisitions: Creating Value in Turbulent Times.” The name represents a bit of marketing designed to appeal to the corporate interest in merger education, suggests Prof. Stuart Gilson, whose course considers M&A as a part of the restructuring “whole.” (The similar MBA course leaves M&A out of the title completely.) “I call it restructuring, but most folks would call it M&A,” says Gilson.
Some of his cases take a valuable long view that brings the deal-making and restructuring elements together in the same analysis. One case is that of Scott Paper, which Harvard examines through the Al Dunlap years of the mid-’90s, on through its acquisition by Kimberly-Clark in 1995. The executives who attend his course get a somewhat contrarian perspective. The work at Scott by the man nicknamed “Chainsaw Al” was “one of the most maligned and misunderstood of restructurings,” says the professor, who organizes all financial projects into three stages: design, implementation, and marketing. The last is “a much-neglected, but very important, stage, because the roadside is littered with mergers that Wall Street simply hasn’t bought.”
Columbia professor Enrique Arzac knows that by limiting his course to three days, “you cannot make room for everything,” so he has chosen to build it around premerger activities, and in particular the need for attention to due diligence in all elements of the acquisition. “We don’t have a separate session we call ‘Due Diligence,’” he says. “All the professors focus on it.” What’s lost, he says, is negotiation work and postmerger analysis. For this expertise, executives are steered to separate classes at Columbia.
Not all professors think a merger week can be shortened, though. Of Kellogg’s program, Raviv says, “I’d never cut it to three days; I’d rather cancel.”
Indeed, opting out entirely seems a sensible choice at many schools. New York University’s Stern School of Business, with a broad catalog of open-enrollment finance classes, has no M&A course — but devotes plenty of faculty firepower to mergers in degree-granting programs. Noncredit executive programs like “Derivatives Survival Training” and “Valuation of Intangibles” are more targeted.
There’s “such a proliferation of M&A programs, we’re not sure what we’d add if we did our own two-day seminar,” notes Stern Executive Programs academic director Kenneth Froewiss. “Where’s our competitive advantage?”
Roy Harris is a senior editor at CFO.