Is there a better way to increase shareholder wealth?
Mergers and acquisitions (M&As) have roiled the U.S. utility industry in recent years as corporate leaders have responded to dramatic changes in their industry by combining with their peer companies. Between 1996 and 2000, U.S. utilities announced over $400 billion worth of transactions involving domestic companies alone, according to research from E Source. This figure, while staggering, does not include transactions between a U.S. utility and an overseas utility; those deals exceeded $75 billion in value during the same five-year period.
As the industry tries to digest its many M&A transactions, and potentially ponder future deals, a word of caution is in order: M&As are a tool, not a strategy, and there are many ways that the tool can fail to deliver the expected benefits.
Numerous management consulting firmsincluding McKinsey, Mercer, and A.T. Kearney, among othershave analyzed M&As, and concluded that they rarely add value to acquiring firms. The reasons these deals have died are remarkably consistent across many industries:
- Acquirers overpaid.
- Acquirers assumed synergies would materialize or could easily be created.
- Acquirers minimized or overlooked the challenges of integration.
- Acquirers did not have a clear understanding of how an acquisition would bolster their competitive position.
Within the utility industry, regulatory delays or rulings that shift economic benefits of a merger to customers from ratepayers is the critical fifth hurdle that companies must clear for a transaction to succeed. Numerous companies failed to clear this hurdle when they proposed transactions during the 1990s.
The well-documented inability of most mergers to add value to acquiring firms raises an important question: Should utility leaders be using other tools to build shareholder wealth?
As the restructuring of electric and gas markets across the U.S. slows down, utility leaders have been given additional time to reconsider some of the conventional wisdom from the mid- to late-1990s. Back then, it was virtually an article of faith that the transition to a competitive market would be rapid, which meant utilities had to transform themselves overnight. For many, M&As offered the only hope to whip their company into competitive shape overnight.
But as restructuring pauses in the wake of the California crisis, utility leaders should re-think some of the basic tenets of marketing as a way to add value with less risk. For example, rather than acquiring another market via M&A, how about penetrating your existing market more deeply? Despite being an object of M&A speculation for years, Southwest Gas worked hard to gain greater market share from electric utilities in Phoenix, Tucson, and Las Vegas. In the Pacific North-west, Northwest Natural Gas is fightingand winninga spirited market-share war with surrounding electric utilities.
Electric utilities generally have deeper pockets, and will win outright pocketbook wars with gas utilities. But, this financial imbalance has forced gas utilities to be scrappier and get even more creative.
If marketing is not your company's forte, restructuring your company's business processes might yield more benefits than a merger. I'm not talking about the mechanical annual budgetary exercise where managers grit their teeth and