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Measuring the Merger: Fact, Fiction, and Prediction

Fortnightly Magazine - October 1 1996

Five of the merger transactions have announced employee reductions ranging from approximately 3 to 10 percent of the premerger workforce.

While most companies did not disclose significant details about merger savings in their annual reports, CIPSCO reported:

"Approximately two-thirds of the savings ... will be achieved by eliminating duplicate corporate and administrative programs, from purchasing economies and reduced electric production and natural gas costs. The balance of the savings ... will be achieved through reduced labor. As duplicate functions and services are eliminated, we foresee a workforce reduction of about 300 positions, or 3.4 percent of the

combined workforce. Both companies instituted a hiring freeze in 1995 to begin this reduction. Because this reduction is expected to be accomplished essentially through attrition, no early retirement or voluntary severance programs are anticipated."

But how much of these savings derive strictly from the merger (i.e., elimination of duplicate functions) and how much from process reengineering?

In the last several years, many utility companies have adopted reengineering programs that have led to workforce reductions either through early retirement, attrition, or voluntary separation programs. To the extent that these programs continue successfully, the portion of postmerger savings due to labor reductions will decrease as a percentage of total postmerger savings. This potential decline in labor savings may not, however, produce a corresponding decline in merger-related costs. Hence, the net savings derived from the merger may decline.

Five of the transactions estimated merger-related costs (em excluding acquisition premiums,

if any (em ranging from $41 to $248 million, or 7 to 15 percent of total gross estimated merger savings. These merger-related costs include transaction costs, transition costs (costs to achieve merger savings), and costs for premerger initiatives between the companies. The tension between these necessary merger costs and a potentially declining pool of savings will likely push utilities toward strategic alliances and partnering to enhance shareholder value. As the universe of low-cost, contiguous utilities shrinks, competition to find attractive merger partners will increase (em as will unsolicited offers and hostile takeovers.

Taking Over:

Mergers as Weapons

Although no hostile takeover has ever succeeded in the electric

utility industry, two attempts were launched in the midst of the "friendly" deals discussed above.

In August 1995, PECO Energy Co. offered $3.8 billion for PP&L Resources, Inc. (PP&L). That offer, firmly rejected by PP&L's board of directors, met with strong opposition from PP&L customers and state legislators who feared higher rates and local job losses. A sweetened October offer of $4.3 billion was also rejected by the PP&L board, which argued that merger with the higher-cost PECO would expose PP&L's shareholders to greater risk of stranded investment.

Still pending is Western Resources' hostile attempt to break up the friendly Kansas City Power & Light (KCP&L) merger with UtiliCorp United, one of the most contentious battles in the utility industry. After its initial $1.7-billion offer was rejected by the KCP&L board of directors in April 1996, Western Resources undertook a multimillion-dollar advertising campaign that included full-page advertisements in The Wall Street Journal, and filed proxy materials with the Securities and Exchange Commission