VideoYou 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.
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