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 valua the discouraging statistics fly by on the screen behind him. McKinsey says s it's 83 per- cent. At last, the inevitable hand shoots up in front: “Is this going to be a ‘ion errors to culture clashes— ‘74 percent of deals fail to create shareholder value; KPMG sa class about why we shouldn't acquire anybod: University executive-education programs tackle one of the business world’s toughest jobs: teaching M&A. By Roy Harris A Lesson Beforel8 heard it hefore. “No. We're going to talk about how to improve your probability for success,” he re- sponds. But then another hand is raised, with a question not so easi- says Carol Ritchie, a director of finance for Pfizer Ine’ consumer health-care division, which sent a senior ‘manager, John Schumacher, to attend this Wharton ‘M&A class. “John came baek with some tools that he ‘wants to put into place,” including new valuation ly answered: "Is there any correla tion between those suecesses and the people who've taken this class?” The queries eapture two essential eoncerns on the versity of te complex, sive week minds of the 60 attendees here at the Pennsylvania's impressive Aresty Insti where they are about to navigate an in of study. Are acquisitions the way to go, ifthey so of 5B cro ten seem to destroy value? And if companies do par= sue M&eA, can a class help them learn to doit right? With their checkbooks, corporations are guard: cay voting that the answer to both those eoncerns is yes. Despite the sharp slide in acquisitions last yea, 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 willbe sent by their employers to “open enrollment” university dasses like this one, about the same as last year's attendance. ‘We support this type of development activity; May 2002 methods that could allow the Pfizer unit to price riski- er deals more effectively Wharton is one of seven schools—the others are the University of California, Los Angeles; the Uni versity of Chieago; Duke University; Northwestern inford University; and the University to offer weeklong sessions. Shorter courses are available at Columbia University, Har- vard Business School, the University of Michigan, the California Institute of Technology, and elsewhere, Programsusually bearboth theschools stamp and University; of Virgi PHOTOGRAPH BY JAMESA Lesson Before Buying the stamp of the professor in charge. (In deed, teachers often take their courses auite personally, and may toss darts atthe approaches of competing univer ‘Margaret Neale, an organizational be- haviorist and expert in negotiations, will lead Stanford’ frst weeklong M&A pro- ‘gram in August, for example, using her ‘own negotiating model and taking the program deeper than most into the area ‘of merger-related human-resource man agement. “The best assets in an acquis tion ean just walk after the deal” she says so her class will “leverage what we know about why thats” to help participants re- tain acquired tale ‘Thecourseat UCLAS Anderson School oozes histori perspective. Prof. J. Fred Weston, 86, started stadying mergers 1948, before the fist srave of conglomerates and be fore todays dominant net presentalie cash-flow valna- lee tion models were created. [haa Through the decades, he sas therensonsbehind M&A diss ters haven't changed much, evenifthe finance tools for pre- venting them are bette. “The ‘number one reason s that companies pay too much; number to is they underest rite the problems of megration: nimber three, people don have enough experience when they start aye Weston. Ttban area svheresouhavetohavedone ittodoitwel” HELP FROM MONTE CARLO The chance for companies to let staffers sain experience in a controlled classroom environment has kept M&A courses among academe’s healthier programs, even as slashed training budgets cut ex- cecutive-education revenuesin general by about 15 percent last year, In 2001, US. schools still attracted roughly 40,000 participants to open-enrollment classes, billing companies more than $200 mil- lion in tuition, administrators estimate, The continued popularity of M&A cours esleads some sehools to compete hard in that field, leveraging their special teach- ing skills and reputations and stressing any uniqueness in their programs, For Whartonis offering—at a cost of $8,250 the nation’s priciest merger wweek—the course lineup issimilar to that inoth programs: valuation, strategicas ntegration, negotiation, due diligence, amitrustand legal perspectives, and case studies, The main attraction, not surprisingly, is the quality of Pe a range of merger-related dis- ciplines, including finance and accounting, organizational be- havior, and lav The teaching technology is ns faculty members across cy eae erde sions 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 PROF. MARGARET NEALE, AN EXPERT IN NEGOTIATIONS, PLANS TO APPLY HER OWN MODEL TO STANFORD'S FIRST WEEKLONG MERGER PROGRAM. also advanced. In Wharton's"“MegaMicro case, a simulation modeled on an actual 17 Honeywell acquisition, participants see how their decisions affect the value of the target. If they keep the targets sales foree intact and spread its leadership ca- pabilities to the combined entity, for ex- ample, new valuation data lashes to them, allowing for a slightly higher bid price. Othersoftwarelets teams seea Monte Car lorstyle process in action, with their merg- fleeting, ‘The pace is rapid-fire and the style is interactive, filed with breakouts designed to encourage teams of finance and nonfinance staffers to establish val- uation disciplines, including factors that may not be reflected in the financial statements of the target. “You need to un- derstand what is eaptured and what is not when you forecast the bottom line” hoetells the class, “Ifthe eompanyis alow cost provider in the industry, for exam- ple, does that show up in its finaneials?” Beyond urging participants to run risk-adjusted eash-flow analyses for a age of seenarios, the main message st Wharton is to resist any force, whether a rival bidder or yourown CEO, that tempts you to suspend your discipline. The strongest force, says Holthausen, may be ternal. “AS soon as you fall in Jove [with a company], you become undisciplined.” Compounding other M&A problems Singh points out, some companies tie bons pay to factors unrelated to the eash- flow goals in the deal, thus potentially re warding value destroying mergers. HEY, WHAT ABOUT ENRON? The discipline of companies like Cisco Sys- temsand General Electric, which use al-