In recent months U.S.

companies have announced a slew of

merger and acquisition (M&A) deals. For example, in
November, The St. Paul Companies, a Minnesota-based
insurance company, announced its decision to merge with
Travelers Property Casualty to create the second-largest
insurer in the U.S. with $107 billion in total assets and
premiums of more than $20 billion. That transaction came on
the heels of Bank of America's announcement that it would
acquire FleetBoston in a $40 billion-plus stock deal. In
addition, GE has said it plans to acquire Amersham, a Britainbased life sciences and medical diagnostics company with
more than 10,000 employees and $2.5 billion in annual
revenues.

 To some market watchers, such

transactions signal a comeback for the
M&A market, which has been in a
slump for the past few years. But
Wharton faculty and other experts say
the M&A frenzy of the 1990s is unlikely
to be repeated this time. Instead, they
suggest, valuations and expectations
that reflect reality, not desire, will
drive this round of activity.

 Wharton management professor

Harbir Singh, who has done extensive
research on mergers and strategic alliances,
believes that the recent up tick in M&A deals
reflects the release of pent-up demand.
"Transactions slowed down after the Sept.
11 attacks. In part, this was because stock
prices fell, so companies that were using
stocks to make deals were unable to do so.
Since then, the economy seems to have
improved, interest rates are still low, and
stock prices are rising, so the economic
drivers of M&A deals have returned."

 Singh explains that in addition to the improving

economy, two long-term factors are driving the
resurgence of M&A. The first is industry
consolidation. "It is clear to companies in industries
ranging from retail banking and insurance to
specialty chemicals and telecommunications that the
minimum size to be a meaningful player has
increased," he says. Second, globalization is
redrawing the economic and political boundaries of
almost every industry. "Globalization is like a form
of deregulation," says Singh. "Companies are
looking beyond national borders to seek growth in
global markets, and mergers offer an effective way
to expand into new regions."

 Despite the up tick, M&A activity is unlikely anytime

soon to scale the giddy heights it reached during the
boom. During the period from 2000 to 2002, for
example, the value of M&A activity retreated from a
record $1.33 trillion to $441.3 billion, according to
Merger stat, which tracks merger and acquisition
activity. Merger stat reckons that overall deal value
added up to $194.2 billion in the first half of 2003,
compared to about $182.0 billion in the first half of
2002. Merger stat's website lists this year's deal
flow in the U.S. at $487.3 billion compared with
$428.3 billion last year. In Europe this year the deal
flow was $531.2 billion compared with last year's
$525.4 billion.

 If M&A markets are still sluggish compared with the

boom years, it is because the factors that contributed
to the fall haven't gone away. Corporate scandals and
uncertainty about the economy played a large part in
the decline, says Wharton accounting and finance
professor Robert W. Holthausen. Although the
economic reasons for mergers and acquisitions
including faster access to new products and markets
did not disappear, uncertainties drove more companies
to sit on the sidelines instead of taking action.
The shaky economy also multiplied the inherent risks of
M&As, he adds. Acquisitions or mergers are complex
transactions. First, theres a need to determine the
strategic fit of the companies, decide who will run the
business, and agree on how compensation will be
aligned. Other issues include tax and legal implications,
and board makeup. As we have seen, there are a lot of
things that can go wrong.

 Singh adds that in distinguishing failure from success in

M&A it is not so much what you buy, but what you do
after you have bought it and how well you do it.
Executives need to have a realistic outlook at the time
of the initial transaction, and maintain that objectivity
while the newly acquired business is integrated into
existing operations. Executives sometimes fall in love
with an acquisition and want it to work at any cost, notes
Singh, who along with Holthausen, teaches a Wharton
executive education course on developing and
implementing M&A strategies.
Rewriting the Rules-The economy aside, a pair of June
2001 pronouncements issued by the Financial Accounting
Standards Board (FASB) may have contributed to the
slowdown in M&A activity, according to Shaun Kelly,
KPMGs national partner in charge of transaction services.
FASB is the industry organization that establishes
standards for financial accounting and reporting.

 FAS 141 and 142 rewrote the rules on the way that
goodwill was treated, explains Kelly. After they took
effect, the premium (the excess of purchase price over
fair market value of the acquired companys assets) in
an acquisition is no longer charged to expense over
time. Rather, that premium, or goodwill as it is called,
is tested for impairment, with indicated impairments
charged to expense when known. This creates a kind
of scorecard that lets investors in on how successful or
unsuccessful the transaction was.
Impairment generally occurs if the fair value of the
underlying goodwill is less than the carrying value (or
amount reflected on the balance sheet). When it
comes to goodwill generated from a merger or
acquisition, impairment might occur when the current
value of the acquisition is significantly lower than it
was when the acquisition was first made, and has
remained lower for an extended period of time.

 Before FAS 141 and 142 were issued, companies that made
acquisitions often accounted for them under the pooling of
interest method, which made it difficult for outsiders to
calculate the premium.
But in the wake of FAS 141, called Business Combinations,
companies can no longer use pooling of interest accounting
treatment for acquisitions. Instead, assets have to be
recorded at fair market value and the premium is charged
to goodwill. Meanwhile, FAS 142, called Goodwill and Other
Intangible Assets, eliminates the amortization of goodwill,
which means companies are generally required to keep
premiums on the books indefinitely.
Although that might seem to be favorable, companies are
also required to review their goodwill on an annual basis to
determine if it has permanently declined in value. If it has,
the goodwill must be written down to reflect the current
value.

 Kelly notes, though, that as companies learn to cope with

the reporting requirements of FAS 141 and 142 and with
other challenges, the M&A market will continue to pick
up. Its not a sharp, hockey stick kind of increase, he
reports, but it does represent steady growth.
Thats because, according to Kelly, mergers and
acquisitions are still a key part of corporate strategy,
offering access to new markets, technology and
customers. But hes quick to add that valuations today
are more realistic. M&As are now more likely to be part
of a well-thought-out strategy instead of a spur of the
moment transaction, he says. Top management and
the board of directors are likely to first ask questions
such as: How does the deal fit in with the companys
strategy; what are the advantages, if any, of buying
technology through an acquisition instead of developing
it internally; how will the firms be integrated, and was
sufficient due diligence performed?

 Todays methodical approach is a sharp contrast to

the purported style of some famous companies, like
WorldCom, observes Holthausen. Several reports
have suggested that a number of boards did not
play much of an oversight role during the acquisition
boom of the 1990s. Some of the findings on
WorldCom indicate that the board sometimes spent
only 20 to 30 minutes reviewing a multibillion-dollar
acquisition.

There are reasons for increased scrutiny on the part
of boards. For one thing, the pullback in stock prices
(compared to the late 1990s) means that its not as
easy for a buyer to use inflated stock as currency for
an acquisition. More deals call for at least some
cash, which may spur directors to engage in a higher
level of review before blessing a transaction.

 But Holthausen says that regulatory legislation, like

Sarbanes-Oxley, is another reason. Sarbanes-Oxley
has nothing that specifically addresses the
responsibility of the board in a merger or
acquisition, he notes. But it does call for greater
accountability on the part of management and the
board, which tends to nudge directors in the right
direction.
Trend, or False Start? = The ingredients may
indeed be in place for a resurgence of M&A activity.
But Tom Butler, a partner in the transaction services
practice of PricewaterhouseCoopers, isn't about to
declare the start of a trend. There's certainly been
an upsurge, but we have seen false starts before,
he cautions. However, I think this up tick will have
legs because of the hot high yield debt market. If
that debt market cools off, then the M&A market

 He adds that the last two months have been very busy. For
now, the banks are back in the market, even though many got
burned in the last surge of M&A volume, he reports. No one
knows whether that activity involvement will continue, however.
This time around, banks want EBITDA (earnings before interest,
taxes, depreciation and amortization) to be scrutinized carefully,
and they want to be comfortable that the buyers can improve
EBITDA and not just rely on run ups in the valuation multiples.
Luis Acosta, managing director of GE Corporate Financial
Services, also has some concerns. In a recent presentation he
gave at the M&A East conference, titled "You've Signed The
Deal - Now How Do You Get It Financed?" he noted that buyout
fund raising in 2002 reached only $17 billion, less than half of
the 2001 level and a far cry from the $63.3 billion peak reached
in 2000. Through the first half of 2003, only $4.1 billion was
raised. But Acosta is quick to point out that despite a decline in
capital raising, the inventory of buyout equity capital and
venture capital remains healthy.

 The deal market continues to be challenging due to

economic uncertainty," he says. "In addition, lender
consolidation continues, which limits choice and
availability, and lenders' portfolios remain
challenged, with 8.7% of the issuers in the S&P/LSTA
(Loan Syndications and Trading Association) Index in
payment default or bankruptcy in 2002."
Despite his concerns, Acosta is hopeful. "Private
equity sponsors continue to be attracted to high
quality properties, and deals are being carefully
structured and priced to gain market acceptance,"
he observes. "There's more caution, but
opportunities are still available in the middle market
segment."

 In the long run, says Holthausen, theres a good

chance the M&A market will continue its comeback.
We have been through a rough patch, but as we
gain distance from the corporate scandals of the
past few years, people will be more comfortable, he
suggests. And there are still sound reasons for
M&As. The activity has a history of being cyclical
there are waves of mergers and acquisition, and
then things slow down a bit, and then they resume.
Singh, too, is optimistic. "It is a good thing that
many M&A deals these days are cash-based, and
that stocks are now valued appropriately," he says.
"That forces discipline on companies."

 Among concerns raised by industry analysts who are

tracking Hewlett-Packards proposed acquisition of
Compaq is the thorny question of corporate culture.
Hewlett-Packard, founded in Palo Alto in 1939, has
long been famed for the "HP way," its much-touted
corporate culture which fosters innovation by giving
employees autonomy and opportunities for
professional growth. Compaqs image is very different:
Newsweek, while terming HP "literally the original
high-tech garage startup," describes Compaqs 1982
origins as "reflecting the giddy period when PCs were
busting out." Business Week notes that Compaq has
been viewed as "a mere purveyor of hardware" and
that the employees it will be contributing to the deal
will be mostly lower-paid computer-repair people. The
merger announcement led Slate. COM to wonder: "If
HP Swallows Compaq, Is It Still HP?"

 Can a mega-company absorb another mega-company

and still run things the way it used to? Should it even
try? How large does corporate culture loom in the hightech sector, or in any industry? Is there one type of
culture that holds the key to success? And how
important is the smooth blending of two distinct
corporate environments to the success of a merger or
acquisition?
"HP has generated a lot of enthusiasm and energy from
their employees because the company has recognized
their individual achievements and given them broad
opportunities for individual growth," says Wharton
management professor Nancy Roth bard, noting that
HPs corporate culture has up until now made it an
industry leader. "Thats also important for retaining
people. Even in a tighter labor market when it might
seem like keeping employees isnt as important, it still
has a huge value because bringing in and training new
employees can be so costly. The HP way continues to be

 useful in todays environment." HP, Roth bard adds,

should be sure to handle the innovators in the newlymerged company with kid gloves because "in the
technology business, innovation is the ultimate
survival game."
Roth bard also cites the capacity for change as an
important element in successful companies. "A
culture that is adaptable - both to market conditions
and to the firms leadership - will help a company
survive and grow long-term. Consider GE, where Jeff
Immelt is in the process of taking over for Jack Welch.
Hes not Jack Welch - he wont be able to lead in
exactly the same way - but hopefully the culture is
adaptable enough to his leadership style that he will
have the chance to be effective."

 Wharton management professor Peter Cappelli,

director of the schools Center for Human Resources,
believes that corporate culture is most effective when
it is aligned with a firms business strategy. "If you are
making widgets or producing hamburgers, basically
doing the same thing over and over, an approach like
the HP way isnt helpful at all." And in various kinds of
low-cost manufacturing like the textile industry, the
business is so highly cyclical, cost-driven and variable
that companies cant afford to protect their employees.
"But if HP is trying to do what its always done," says
Cappelli, "which is create innovative products and not
necessarily low-cost products, then preserving the HP
way makes sense. The interesting thing about HP is
that they have always tried with great care to make
what they were doing in the product market align with
how they managed their people. They buffered
employees from the ups and

 downs of the business, because they wanted longterm commitments from those who had been working
with the products over time and understood all the ins
and outs. Compaq doesnt have the same approach."
Patti Hanson, a human resources consultant with FBD
Consulting based in Lea wood, Kansas, points out that
there are limits to how entrepreneurial and innovative
a firm can be - especially a firm the size of a merged
HP and Compaq. "Certainly you have to have some
entrepreneurial spirit; if you dont in high-tech, youll
be obsolete in no time. Yet if youre totally that, and
dont have the structure or discipline to figure out
how to set goals and meet budgets, you wont be
successful either." Hanson suggests that this failing
was what brought down many of the dot.coms. "I
think you have to watch both sides of the house."

 Ultimately, though, high-tech firms can succeed with

either an entrepreneurial or a structured approach, but
not both, Hanson says. "One group might say, Ask first,
then do it if its approved at all levels while the other
group says, Do it, then ask for forgiveness. That
creates problems. A high-tech company I used to work
for was pretty entrepreneurial and allowed a lot of risktaking. We would roll out a new process just with an
email and six steps to follow. One executive we hired
from a highly structured company would say, Arent
there going to be operations manuals and train-thetrainer classes? Im not saying one is right and one is
wrong. You just need to make sure everybody is
marching to a similar tune."
Mauro Guillen, professor of management and sociology,
questions the whole notion of discussing a companys
overall culture. "If you are specifically talking about the
parts of HP that have to come up with new products
and figure

 out how to sell them, then the HP way is probably the

best. But I am skeptical about generalizations that any
Fortune 100 company operates under a specific culture.
R&D people are probably organized very differently than
in operations, and production people differently than in
marketing. They are dealing with distinct problems, time
pressures and external constituencies. Yet the company
needs to act as if it were one organization. This is a huge
problem not just for HP but for all firms." Guillen says that
a merger then greatly complicates the already
complicated task of integration. For example, the cultures
of two different firms marketing departments may not
only be organized differently from each other, but will
have developed their own idiosyncrasies over time.
"Effecting change in a strong, decentralized culture like
HP requires power and energy from the top, because
there will probably be a lot of resistance," says Roth bard.
"And

 because the culture is decentralized, you cant

anticipate where the resistance will come from and
proactively target it. HP is spending significant time
right now managing its external constituencies such as
stakeholders and institutional investors. Thats
absolutely critical, but they should also think about
drumming up support internally."
Culture clashes can be a surprisingly large stumbling
block in creating profitable mergers, adds Hanson. She
cites a recent study sponsored by the Society for
Human Resource Management and conducted by
Towers Perrin that was titled "Making Mergers Work."
In the study, HR professionals listed "incompatible
cultures" as among the biggest obstacles to success in
mergers and acquisitions. "The companies may go in
and do due diligence, look at all the financial matters,
but its really the cultural and people issues that can
mean the demise of a successful merger."

 She offers examples of incompatible cultures. One is

structured vs. entrepreneurial, requiring written
processes as opposed to "winging it." Another is formal
vs. informal, having strict rules for attire, chain of
command and obtaining approvals, while another
company allows employees to wear khakis and has an
open-door policy. Centralized vs. decentralized can
also cause problems: Does corporate make and hand
down all the decisions, or can managers respond at the
local level to individual clients? And a company
focused on producing good value at a low price wont
combine well with one focused on asking higher prices,
but tailoring their solutions to clients needs.
With the merger, HP reportedly aims to move away
from products to focus more on providing services. Will
its corporate culture, in addition to successfully
absorbing Compaq, need to undergo a paradigm shift?
Most of the

 professors agreed that HP would have to thoroughly

transform itself to make it in the service sector - an effort
not necessarily facilitated by the merger. "Im not quite
sure how this merger will help them get into services,"
says Roth bard. "HP tried to buy PricewaterhouseCoopers
last year explicitly to get their expertise in services. One
reason the deal fell through may have been HPs
realization that PwCs business was so different from
theirs that it would be really hard to implement. Maybe
they are hoping with Compaq and a new economy of
scale, they can grow in the services area in a more
incremental way."
"Innovation in product is not the same thing as delivering
services," Cappelli says. "There are competencies and
capabilities you need to be a service-sector, customerservice-oriented organization. It requires more sales
emphasis, for one thing. Thats not necessarily the most
obvious fit with the competencies HP has had before."

 Guillen agrees. "A typical plant manager has very

different problems confronting him or her during the
day than a manager of a service operation, who has to
think about ways to increase customer loyalty, create
bundles of services to offer and so forth. The world of
manufacturing is so different from the world of
customer relationships, that it seems the leadership
style and culture need to change as well."
Who initiates the cultural sea changes that may be
necessary when a company absorbs another company
and also tries to change course? Roth bard believes a
lot depends on who is at the helm. "Research suggests
that effective corporate culture change happens most
often with a CEO who comes in as an outsider to the
firm, or as an unconventional insider - somebody who
has had a reputation all along for being different. For
example, when IBM CEO Lou Gerstner was at American
Express, he was

 the outsider coming in. (He had previously been at

McKinsey, where his main client had been AmEx.)
And at GE, Jack Welch was the unconventional
insider. He grew up in GEs plastics business, a
newer, non-mainstream part of the business. They
could be change agents because they werent
bound by the tradition." She notes that HPs CEO
Carly Fiorina, an outsider to the firm, seems to have
been trying to alter HPs culture - to make it more
centralized -since long before the merger was
announced.
In any case, Roth bard says, "merging corporate
cultures is a difficult process that doesnt happen
overnight. And it requires a tremendous amount of
initiative from the firms leadership to make it
happen."

 With the recently announced mergers involving Procter &

Gamble and Gillette, and SBC and AT&T, it's time to ask
one of the most common questions about mergers: What
does it take for a company to be successful, post merger?
After all, many mergers ultimately don't add value to
companies, and even end up causing serious damage.
"Studies indicate that several companies fail to show
positive results when it comes to mergers," says Wharton
accounting professor Robert Holthausen, who teaches
courses on M&A strategy. Noting that there have been
"hundreds of studies" conducted on the long-term results
of mergers, Holthausen says that researchers estimate
the range for failure is between 50% and 80%.
Management professor Martin Sikora, editor of Mergers &
Acquisitions: The Dealmaker's Journal, agrees.
"Companies merge and end up doing business on a larger
scale, with increased economic power," Sikora says. "But
the important

 questions are whether or not they gained competitive

advantage or increased market power. And that will be
reflected in the stock price. "The truth is," he adds,
"mistakes happen. The accepted data say that most
mergers and acquisitions don't work out."
"What Went Wrong?"
According to Sikora, the kinds of problems companies
face with mergers range from poor strategic moves,
such as overpayment, to unanticipated events, such as
a particular technology becoming obsolete. "You would
hope these companies have done their due diligence,
although that isn't always the case," he says.
Aside from those extremes, however, many analysts
view clashing corporate cultures as one of the most
significant obstacles to post-merger integration. In
fact, a cottage industry of sorts has emerged to help
companies navigate the rough terrain of integration -and especially to help

 them overcome the internal inertia that comes with

facing change.
"It's like changing a wheel on a bus," says Cari Windt
from Access GE, which offers GE best practices to clients
who are undergoing M&A transitions. "You can't skip a
beat for your customer." Windt says the earlier a
company attempts to plan, the better. Often times,
however, companies don't plan as thoroughly as they
should: "It's unusual that companies work on developing
quality solutions for the acceptance side of mergers."
Wharton management professor Harbir Singh, who has
done extensive research on mergers, says that the
crucial distinguishing factor between success and failure
in a merger is a sense of objectivity on the part of
executives -- a "realistic outlook" that needs to be
maintained from the initial transaction through the
entire integration process. The danger, it seems, is when
executives "fall in love" with the

 idea of the acquisition, wanting it to work no matter

what the cost.
Sikora agrees. "The most important question is whether
or not the deal is strategically well conceived. If it is,
that covers a lot." For his part, Sikora feels the make-itor-break-it emphasis on merging corporate cultures to
be "vastly overblown." "Culture integration is certainly
important," he says, "but it's always the excuse when
something doesn't work out."
"Look, company A buying company B is really buying
people," he says. "You need to realize that and be aware
that certain issues exist." Negative outcomes -- such as
employee layoffs for the target company -- are
"invariable" and "must be handled humanely." For
example, companies can help these individuals to find
other jobs and provide acceptable severance. Sikora
also advocates immediate and clear communication on
the part of management with

 regard to any problematic issues. "You need to create a

good impression," he says. "Good employees will quit if
they feel their fellow workers are treated poorly."
Losing good employees is part of what a colleague of
Sikora's refers to as "merger syndrome." "There is a
natural distrust of the acquiring company, which leads
to the development of fear and morale issues," he says.
For this reason, people will often leave post merger,
even when they have been treated well. Likewise, he
notes that acquiring companies need to be aware of a
"conquering army mentality." "That happens more often
than it should. If one company is acquiring another,
there needs to be some realization that the employees
of the target company make it what it is.
"Sometimes employee anxieties at the target company
are misplaced, and sometimes they are not," he adds.
For the most part, Sikora views these problems as part
and parcel

 of any merger -- successful or not. "Reality says these

things are what you need to pay attention to and
address. If you can't handle them, don't do a merger."
And Don't Forget the Customer
Sikora views corporate culture as one piece of a much
larger puzzle. "There are lots of buckets to carry," he
says, adding that it's important that much of the
transitional planning take place before the deal is closed.
Everything from apprehending antitrust hang-ups ("some
companies proactively submit proposals for divesting to
the government," he says) to decisions about the
physical plant have to be considered along with
employee issues.
One key stakeholder all seem to agree needs attention,
though, is the customer. For Joanna Serkowski, an
executive leader in GE's program with a background in
M&A, the degree to which customers are part of the
integration plan depends on the degree to which
company

 processes are integrated with customers before the

merger. One thing is certain, though: Customers must be
kept informed. "You need to tell customers about your
merger even when it's seamless," she says; in doing so, a
company is simply confirming its sensitivity to customer
needs.
According to Sikora, the customer should perhaps be
viewed as the biggest stakeholder and treated as such.
"If the customer is a large one, I'd say they should hold
hands with top executives through the transition," he
says. "At the end of the day, that's the cash." As an
example, he sites a merger between two tech firms in
Silicon Valley, both of whom had IBM as a leading
customer. When the merger was announced, they both
lost IBM's business. "IBM wanted to know why they were
not told of the change," he says. He suggests using sales
forces to keep customers informed and having
communications ready for all customers, with a key
message that answers the question,

 "What is this merger going to do for you?"

Is It Possible to Predict Success?
Still, despite planning and good communication, things
can go awry. According to Sikora, one-third of mergers
create shareholder value, whereas one-third destroy
value, and another third don't meet expectations. For
shareholders, these deals can be "a crap shoot," Sikora
says, noting, however, that being in the successful
one-third can add tremendous value.
Aside from solid preparation for a deal, then, how can
presence in that top third be predicted?
"Companies that acquire with frequency and make it a
major core competency tend to do well and perform
better than their peers," Sikora says. In fact, he adds,
more companies regard M&A as essential for growing
value. He cites the recent history of M&A activity as
evidence: As

 M&A activity has cycled over the past decade, the

downturns have tended to be less extreme than years
before. In other words, even when there's a lull in
activity, there are more companies engaging in mergers
than there were before during slow periods. In fact,
according to press reports, last year's U.S. M&A volume
($886 billion) was almost double the volume of 2001
($466.5 billion). "It's more of an established structure,"
he says. "More companies are equipped to do it, and it's
more an integrated part of doing business."
Serkowski has spent considerable time defining ways to
help companies integrate successfully. Mergers are
successful, she says, when they have a "defined plan
and process" to blend the operational with the cultural,
with "tollgates" -- periodic reviews to make sure the
process is working. "In a perfect situation, integration
has begun before the deal is done and the money
changes hands."

 "Integration is really about mobilizing change," Serkowski

adds. "The key question is, what is the change dynamic
of the companies involved -- how quickly do they adapt?"
Although companies may seem similar on the surface and
therefore a perfect match, they are often vastly different
in terms of change orientation, leadership style,
organization systems, and methods of dealing with
conflict, she notes. In addition to the ordinary due
diligence of getting to know the acquired company and
industry thoroughly, speed is essential in these
transactions -- especially with regard to anything that will
impact employees, including layoffs, benefits changes,
location, etc. "Difficult decisions need to be addressed
early on so that they are not lingering and hit later."
One of the most important aspects of the process,
according to Serkowski, is a strong commitment to
change on the part of management. First, there needs to
be

 consistent communication regarding the process;

ideally, Serkowski says, there should be a "rhythm" of
communications for employees, which might take the
form of regular email updates, newsletters, and general
visibility on the leadership level. Secondly,
management needs to assign resources to complete
the transition successfully. Acquiring companies should
consider assigning an "integration leader" to help
oversee the process. According to Serkowski, this is a
"multi-directional ambassador" with leadership skills,
"aggressive project management" capabilities, and
"exceptional people skills." "Listening is key," she says.
The Market Speaks
And what about the recent wave of mergers? Sikora,
Holthausen, and others decline to predict the
outcomes. Holthausen suggests watching for negative
market reactions as one key indicator. "On average," he
says,

 "when market reactions are negative, changes in

subsequent performance are correlated to that
reaction." Sikora agrees: "If the acquiring company
takes a bath on announcement of the deal, then the
market is saying it's a bad deal."
One thing is for sure, though: Procter & Gamble and
SBC have their work cut out for them. "Forty years
ago, these deals were done on napkins, but today I'd
say that mergers and acquisitions are not for the
faint-at-heart," Sikora says. "I always tell my students
that when it comes to everything that needs to be
taken care of during mergers, don't bother prioritizing
--get cracking!"

 Indian Companies Are on an Acquisition Spree:

Their Target? U.S. Firms
Reliance Gateway Net, VSNL, Scan dent and GHCL aren't
exactly household names in the U.S., but they may be
signs of bigger things to come.
These are only a few of the growing number of Indian
businesses that have acquired U.S. firms in the past few
years. And the U.S. merger-and-acquisition activity is just
part of a bigger picture. Indian companies -- usually
quietly, but sometimes with media fanfare -- have been
on a buying spree in continental Europe, Great Britain
and Asia in attempts to become key players in global
markets.
What accounts for all the M&A activity? Faculty members
at Wharton and a New York investment banker who is
advising an Indian firm on the acquisition of a chain of
U.S.

 jewelry stores point to a combination of factors -- means,

motive, confidence and opportunity.
"Over the last decade, Indian firms in various industries
-- most visibly in information technology but also in areas
like auto components, the energy sector and [food
products] -- have been slowly building up to become
emerging multinationals," says Wharton management
professor Saikat Chaudhuri. The outsourcing
phenomenon, in which Western firms have hired Indian
companies for call center work and other tasks, has
reaped benefits for Indian managers, exposing them to
Western companies and management practices and, at
the same time, demonstrating to non-Indian firms that
India is a reliable source of low-cost, yet high quality,
products and services.
Moreover, Indian firms are becoming more profitable -the result, in part, of an ever-booming economy -- and
can access significantly more capital than in the past.
"Incomes

 have grown phenomenally in some companies in some

sectors," says Anil Kumar, managing partner at Virtus
Global Partners, an investment and advisory firm with
offices in the U. S. and India. "But the biggest factor [in
the growth of acquisition activity] is that suddenly,
there's a lot more cash available in the Indian market
than earlier on. Many companies are underleveraged;
they don't have much debt. Their capacity to borrow
from others is a lot better. They can borrow sizeable
amounts of cash, which can be deployed for
acquisitions."
A number of Indian firms see global markets, not the
domestic market, as their chief pathway to growth. "If
you are a large company, you have to have a good
presence in the U.S," Kumar notes. Another factor: "India
is much more confident now. Companies are taking a lot
more risk than earlier on." Astute managers, he adds,
"are realizing that taking on risk [can be] a good thing."

 In addition, regulatory changes in India have made it

easier for firms to acquire overseas companies. For
example, World Trade Organization rules governing
quotas on the importation of textiles into developed
countries were lifted in 2005, sparking an increase in the
ability of Indian firms to produce apparel for non-Indian
markets, according to Kumar.
There is also an element of pride in Indian firms being
able to make acquisitions in America, Kumar notes. "It
means [Indian companies] have come of age and are
better managed than they were 10 years ago. To acquire
U.S. companies, you need to ... have a good capital base
and fundamentals in place. This is a sign that India
companies can truly compete on a global basis."
Jag Mohan S. Raju, a Wharton marketing professor, says
that restrictions imposed by New Delhi on the amount of
foreign exchange that was allowed to enter India have
also

 been relaxed. "Now the country is flush with foreign

exchange. Indian companies [that have acquired
overseas firms] sell products in dollars and take part of
that money to India, some of which ends up in
government coffers."
Yet another factor spurring the acquisition spree: Indian
companies have greater power to raise money in U.S.
capital markets because investors have grown more
familiar with businesses in India, says Raju, adding that
in general, the increase in acquisition activity has less to
do with the Indian government proactively encouraging
it than with the government removing barriers to M&A
deals. "The roadblocks are gone," he says.
An Array of Acquisitions
The increased interest in U.S. acquisitions by Indian firms
comes against a broader backdrop of accelerated
acquisitions by Corporate India of companies in many
places. In the first nine months of 2006, for example,
Indian

 companies announced 115 foreign acquisitions with a

value totaling $7.4 billion, according to The Economist.
That is roughly a seven-fold increase from 2000.
A report by Grant Thornton India shows that the largest
proportion of outbound deals (Indian companies
acquiring international companies) in 2005 occurred in
Europe (50% of deal value), followed by North America
(24% of deal value). The report says that the IT sector
saw the lion's share of outbound M&A deals in 2005, with
23% of the total number of international acquisitions,
followed by pharmaceuticals/healthcare/biotech (14%).
As for deal value, telecommunications led the way with a
33.6% share of deal value, followed by energy (14%), IT
(8%) and steel (6.5%).
The Grant Thornton India report notes three significant
trends in cross-border M&A activity by Indian firms in
2005. First, more than half the deals were cross-border:
58% of

 deal value, amounting to $9.5 billion, and 56% of deal

volume at 192 deals. Second, there were more outbound
deals than inbound deals both in value and volume terms.
Third, while Indian companies "have acquired several
businesses overseas to get an international footprint,
most of these outbound deals have been lower volume
deals, showing that Indian businesses are treading
carefully and minimizing their risks through value buys."
One major U.S. acquisition took place in February 2006
when GHCL, based in the state of Gujarat, India, acquired
Dan River, a Danville, Va.-based maker of home textiles
for $93 million ($17 million in cash and the assumption of
$76 million in debt).
Kumar calls the Dan River deal precedent-setting in that it
may inspire other Indian companies to look for turnaround
situations in their quest for U.S. acquisition targets. "Many
companies have robust management and great
operations

 but their industry is not doing well -- for example, the

textile industry," Kumar notes, adding that Dan River
had many mills inside the U.S., but was facing
significant challenges and was competing with lowcost providers outside the country. "GHCL bought Dan
River for more than $90 million, shut factories and
started sourcing [its raw materials] from India. A year
later, Dan River is doing a lot better. It turned a profit
in October."
Also making major moves in 2006 were members of
the Tata Group, a major Mumbai-based conglomerate
with interests in, among other things, steel
production, transportation, software and hotels. In
June, Tata Coffee paid $220 million to buy Eight
O'clock Coffee, a venerable U.S. brand. In August,
Tata Tea paid $677 million for a 30% stake in Glaceau,
a maker of vitamin water in Whitestone, N.Y.

 According to statistics compiled by the Mape Advisory

Group, there were a number of noteworthy acquisitions
by Indian companies of U.S. firms from January 2000 to
March 2006. They include: Reliance Gateway Net's
acquisition of Flag Telecom in 2003 for $191.2 million; the
purchase by Mumbai-based VSNL of Tyco Global Network,
a submarine cable network, from Tyco International,
based in New Jersey, for $130 million in 2004; and the
acquisition by Bangalore-based Scan dent of Cambridge
Services Holding, a global outsourcing firm
headquartered in Greenwich, Conn., in 2005 for $120
million.
Diamonds: A Dealmaker's Best Friend
Many of Corporate India's cross-border acquisitions have
involved such stalwarts as chemicals, IT, steel and
pharmaceuticals. But sometimes action in the M&A space
can take a glamorous turn: Kumar is currently advising an
Indian company in its negotiations to buy a chain of 100

 U.S. jewelry stores. Kumar declined to identify the firms

involved, but agreed to discuss the reasons for the
Indian company's interest in making a U.S. acquisition.
India has long been known as a center for the cutting,
polishing and manufacturing of quality diamond jewelry,
which is sold to retail stores worldwide. Today, Indian
companies are increasingly moving into the area of
jewelry design. But India's diamond experts have
worked largely behind the scenes, away from the eye of
consumers. The acquirer Kumar is advising, however,
would be able to place its name front and center before
U.S. jewelry customers. The U.S. jewelry market is
divided roughly into thirds among retailers. Department
stores hold about 38% of the market, while mall chains
like Zales have 35% market share and independent
stores the remainder, Kumar says.
Competition in the diamond business is intensifying, and
branding is one way to differentiate oneself. "China is

 becoming big competition for Indian companies,"

according to Kumar. "So Indian companies are saying, 'How
do we go up the value chain?' Branding is one way to do
that for customers who buy from Tiffanys and Zale's as
opposed to an outlet store."
Kumar's client also is looking to increase its profit margins
and improve its pricing power over what it sells. "You do
this by selling [directly] to customers," he says. "This is the
question our company has been facing. It's hard for them
to compete with up-and-coming value-diamond suppliers.
So they said, 'Maybe [it would be better] if we were right in
front of a customer by buying a chain that will help us
increase margins in our business.'" Kumar says the chain
being acquired is a well-known brand, which allows them
to charge higher prices than sellers of value-diamonds.
The goal of the acquiring firm is to keep the management
of the acquired chain intact. "They will not try to shake the

 tree," says Kumar. "U.S. companies tend to shake the

tree right away. Many times that's why mergers fail in
the U.S."
Post-Merger Integration
Indeed, Indian companies may be excited about their
cross-border shopping spree, but Wharton management
professor Raphael (Raffi) Amit, says enthusiasm is no
guarantee of a successful merger.
"Whenever companies in India, Korea, Israel or
anywhere [do cross-border acquisitions], the problems
they encounter are a different culture, different
managerial norms, different compensation and a
different regulatory environment," Amit says.
"Unfortunately, the literature shows companies don't
pay sufficient attention before the merger to the postmerger integration (PMI) issues that need to be
addressed. PMI is a major barrier that firms face as they
try to operate as one entity."

 Amit's advice to Indian companies considering crossborder mergers would be to "pay close attention to the
issues associated with PMI before agreeing to buy a
company. That relates to understanding the strategic
considerations and the merits of such an acquisition;
market considerations that relate to the process by
which companies agree on the terms of the acquisition;
and post-acquisition issues that deal with the degree
and scope of the integration, compensation for
executives and managerial-norm issues."
Looking ahead, Kumar of Virtus Global Partners sees
cross-border deals by Indian firms increasing in number
and changing in nature. "Only the big deals get
mentioned in the newspapers, but there are a lot of
small- and mid-sized opportunities going on [in the $20
million to $60 million range]," he says. "We see a lot of
those happening in the next four or five years." Kumar
predicts more M&A activity in industrial products,
packaging, auto components and textiles.

 Wharton's Chaudhuri says that, like the diamond company

being advised by Kumar, Indian companies in many
sectors will, in years to come, seek out acquisitions that
help them move up the value chain.
"Look at pharmaceuticals," Chaudhuri explains.
"Everybody's doing so much research and development in
India you can imagine they're trying to come up with their
own independent, research-driven drugs that could be
blockbusters worldwide. You can make the same point
about high quality, skilled people [in the diamond
business]. In the IT sector, the future will also see firms
moving up the value chain by doing more consulting
work."
Chaudhuri adds that India's confidence in pursuing such
deals will continue to strengthen. "The success that has
been enjoyed so far has been due to self-confidence. That
will only increase over time. In fact, we now see a reverse
brain drain taking place. People who left are going back to

 India to start up firms or head the Indian operations of

multinational corporations."
Corporate India, as it accelerates its cross-border
acquisitions in years to come, will resemble China Inc.
Says Chaudhuri: "Look at the amount of capital going
into India and how the accounting and governance
practices of the West are being adopted in India, like
they are in China, and how Indian investors perceive
opportunities in foreign markets. There's an analogy
between Indian and Chinese companies. My
prediction is 15 to 20 years from now, Indian and
Chinese firms will compete with Western firms in all
sectors around the world. It's good for everybody. It's
part of the integration of the global economy, and it's
important for India to participate in that."