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.
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