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India Knowledge@Wharton | Taking guard on acquisitions

India Knowledge@Wharton | Taking guard on acquisitions
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First Published: Sun, Jan 20 2008. 11 54 PM IST

Updated: Sun, Jan 20 2008. 11 54 PM IST
Last year saw record spending by Indian firms acquiring companies abroad, and “with several other deals in the pipeline, 2008 may set another new record,” says Vinay Nair, senior fellow at the Wharton Financial Institutions Center. “Amid this frenzy, it is easy to forget the basics.”
In a recent India Knowledge@Wharton opinion piece, Nair had outlined the common mistakes companies should avoid as they unfurl their acquisition plans.
“A key tenet for financial success in acquisitions is, ‘Do not overpay’,” Nair writes. “In other words, the price paid for the target should not exceed the value of the target to the buyer. Simple enough, right? Yet, judging by stock market reactions, this tenet is violated in most of the deals witnessed in the US, as shown in a 2001 study published in the Journal of Economic Perspectives.”
The lessons from the US experience could be useful to Indian companies as they brandish their buying power, he adds.
“To buy a company at the right, or the lowest, price it helps to be the only interested buyer,” he notes. That means avoiding competition.
“The best tactic for this is to think differently. Doing so makes it more likely that you will be the only one approaching a target.” For instance, buyers might consider aiming for lower profile targets, such as smaller or private firms, he says.
When it comes to bidding wars, “the discipline to walk away at a predetermined threshold price is critical,” Nair adds. “Many acquirers make the cardinal mistake of underestimating their competition… Lack of respect for the competition can lead to hubris where the winner will almost surely overpay.”
Reinventing GE
Jeff Immelt, chairman and chief executive of General Electric Co., is remaking one of the world’s best-known firms into an eco-minded innovator. Judy Hu has to communicate his vision to the world.
Hu is global executive director for advertising and branding for the Connecticut-based conglomerate and overseer of its award-winning Imagination at Work and Ecomagination ad campaigns. “We’re reinventing a brand and a company,” says Hu, who spoke at the 2007 Wharton Marketing Conference.
Hu’s staff and GE’s advertising firm decided that most advertising around environmental themes was “too focused on the negative, all about doing more with less and gloom and doom,” she says. “That’s the direct opposite to what we believe at GE.” Innovators are necessarily optimists, she points out: They believe that the future can be better because you can make it better.
Although GE is a worldwide company with an overarching story, it tries to tailor the delivery of its message to the various countries where it operates, Hu says. Specifically, it tries to show how its expertise might apply to problems that local people care about, and it strives to use words and images that will uniquely resonate with them.
Hu pointed out that the steps she undertook to reposition GE’s brand are the same ones that a younger company might use to develop its brand. The process can move faster today, thanks to the Internet, but the basic steps haven’t changed as forms of media have multiplied.
First, a company must develop a unique brand essence. It has to figure out who it is and how it differs from competitors. Then it must create a guiding framework for its many forms of communication; different media can stress different parts of the message but they can’t contradict the basic theme.
Call it the marketing equivalent of jazz improvisation: Ads can riff on one theme or another, but the melody must remain.
And finally, the firm has to deliver the message consistently. “Consistency is key,” Hu adds. “Jeff likes to say, ‘Our brand is a promise. Imagination at Work is who we are’.”
Employee value
Contrary to management theories developed in the Industrial Age, employee satisfaction is an important ingredient for financial success, according to a new research paper by Wharton finance professor Alex Edmans.
In a paper titled, “Does the stock market fully value intangibles? Employee satisfaction and equity prices”, Edmans examines the stock returns of companies with high employee satisfaction and compares them with various benchmarks—the broader market, peer firms in the same industry, and companies with similar characteristics.
His research indicates that firms cited as good places to work earn returns that are more than double those of the overall market.
Companies on Fortune magazine’s annual list of the “100 Best Companies to Work for in America” between 1998 and 2005 returned 14% per year, compared with 6% a year for the overall market, according to Edmans’ study.
The results also hold up using an earlier version of the survey that dates back to 1984. “One might think this is an obvious relationship—that you don’t need to do a study showing that if workers are happy, the company performs better. But actually, it’s not that obvious,” says Edmans.
“Traditional management theory treats workers like any other input—get as much out of them as possible and pay them as little as you can get away with.”
In today’s business world shaped by new technology, knowledge and creative thinking, the value of each employee is increasingly important, although hard to measure directly, Edmans says. “Nowadays, companies are producing more high-quality products. They are focusing on innovation and looking for the value-added to come from workers rather than machines.” Since key outputs, such as teamwork, building client relationships and idea generation, are difficult to measure, motivating workers by paying by the piece is less effective. This leads to the increasing importance of employee satisfaction as a motivational tool.
Pleasant working conditions can lead to employees identifying with the firm, and thus exerting more effort than the minimum required by the employment contract. Moreover, it can be a powerful method of retaining key employees.
“This paper documents statistically and economically significant long-horizon returns to portfolios containing companies with high employee satisfaction,” Edmans writes in his paper. “These findings imply that the market fails to incorporate intangible assets fully into stock valuations—even if the existence of such assets is verified by a widely respected survey.”
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First Published: Sun, Jan 20 2008. 11 54 PM IST