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Measuring the Merger: Fact, Fiction, and Prediction
(SEC) to take its offer directly to KCP&L shareholders.
In response, KCP&L and UtiliCorp postponed the shareholder votes on the merger from May 1996 to August 1996, and modified the exchange ratio about 10 percent in favor of KCP&L. The utilities also converted the legal structure of the transaction to a "two-step reverse triangular merger," which may be approved with affirmative votes from just 50 percent of the shares present at the shareholder meetings. However, an August 2, 1996, federal court decision held that the merger was subject to approval by two-thirds of company shareholders, further delaying the vote on the merger. Meanwhile, KCP&L's board of directors rejected Western Resources' June 1996 sweetened offer of $1.9 billion.
Mergers as Measured
A quick look at reported benefits for two recently completed mergers, Cinergy and MidAmerican Energy, illustrates the dynamics of today's merger environment.
Cinergy was formed in October 1994 by the merger of Cincinnati Gas & Electric Co. (CG&E) with PSI Resources, Inc (PSI):
s Operating revenues increased $133 million, or 4.6 percent; operating expenses decreased $8 million.
s Earnings per share increased from $1.30 in 1994 to $2.22 in 1995.
s Savings from nonfuel operation and maintenance (O&M) costs reached $42 million, compared to initial estimates of $21 million for 1995.
s Workforce reductions exceeded 800 positions by December 31, 1995, compared to a projected reduction of 450 positions in the first three years after the merger.
s Capital expenditures reached $170 million (em 35 percent below originally budgeted amounts for the two stand-alone companies.
s Ratings on CG&E and PSI securities secured upgrades at four ratings agencies.
s Total shareholder return for 1995 reached 39.1 percent, compared to the S&P Electric Index's 31.1 percent.
MidAmerican Energy Co. was formed July 1, 1995, by the merger of Midwest Resources Inc. with Iowa-Illinois Gas and Electric Co.:
s Operating revenues increased $32.7 million during 1995; operating expenses increased $5.2 million.
s Earnings per share stayed at $1.22 for 1995, unchanged from 1994. (The 1995 earnings per share includes costs to complete the merger, which reduced earnings per share by 24 cents.)
s Workforce reductions hit 700 positions by December 31, 1995, an overall reduction of 17 percent of premerger levels.
s Electric price increases (2) totaling $20.6 million were approved by regulators during 1995.
s Construction costs for 1996 are budgeted 20 percent lower than 1995 construction costs.
Both Cinergy and MidAmerican expect the benefits of their respective merger transactions to continue. Cinergy disclosed this outlook for its earnings through 1998:
"Our objective over the 1995-98 period is to achieve earnings growth averaging 6 to 8 percent annually. By comparison, several analysts estimate that the industry as a whole will have average growth rates under 2 percent over a similar timeframe. Achieving our earnings growth objective will depend on continued merger savings, including net savings from reengineering ... beginning in 1997. Our estimate of earnings growth also depends on successful outcomes from pending gas and electric rate cases.
"With the rapidly changing industry environment and the numerous changes merged companies undergo