CROSS THE COUNTRY, CRITICISM RISES FROM INVESTOR-owned utilities as public power agencies are drawn into regional or national markets through power pools and the geographic expansion of power...
Study Points Out M&A Difficulties
Utilities that participate in a merger are just a likely to find revenues shrinking as growing, according to a recent study of completed and pending M&A activity among U.S. utility and energy companies.
The study, "Energy Utility Perspectives (em Creating Value Through Mergers and Acquisitions," conducted by Mercer Management Consulting, examines 43 completed and 53 pending U.S. utility deals conducted between 1985 and 1995.
In calculating the impact of the mergers and acquisitions, Mercer charted the compound annual growth rates of the utilities included in their study for both operating profit and revenue versus the Standard & Poor's utilities index. Of the 33 acquiring utilities (representing 43 deals), Mercer rated only 12 as successful in the sense of providing superior revenues and operating profit growth. Mercer found a "wide disparity in value" for shareholders of the acquiring utility. Growth rates for the 33 acquirers tend to cluster in four categories:
• Shrinkers. 21 percent of the utilities underperformed industry averages in terms of ability to generate revenue and profit growth from M&A activity;
• Cost-cutters. 12 percent held the line on profitability by aggressively cutting costs, but still saw revenues shrink despite acquisition play;
• Unprofitable Growers. Nine percent exceeded utility sector revenue growth rates, but could not translate their acquisition strategy into superior levels of profitability; and
• Profitable Growers. Thirty-six percent can be labeled stellar performers because their acquisition helped them to outperform others in the sector in terms of both revenue and operating profit growth.
"The wide disparity in results suggest that the inherent differences in the way utilities approach mergers or acquisitions can have a lot to do with how well they ultimately perform," said Andy Patterson, a Mercer principal. "A critical finding in our study is that strong leadership and post-merger management are key distinguishing factors in an M&A strategy."
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