June 1 , 2002
Repeatable M&A: Creating a Value Chain Reaction
How building capabilities for repeated M&A can increase shareholder value.
Despite significant recent upheavals, the energy industry's long-term consolidation is likely to continue. Many companies appear to be moving towards, or have announced, consolidation strategies in their preferred areas of the industry. ()
Nonetheless, PwC Consulting's analysis shows that, as in most other industries, few energy acquisitions in the last few years have created above average value. Why? It appears that Wall Street has perceived some deals from the start as not creating value, because of insufficient or unclear strategic rationales, and/or because the Street did not believe that the companies could or did execute those deals well. In PwC Consulting's analysis of 50 recent M&A transactions, 30 were in this category, including NiSource's acquisitions of both Bay States and Columbia. The Street saw 11 other transactions initially in a positive light, but found that implementation was more problematic than expected-for example, although post-announcement share prices performed better than the S&P utility index, National Grid's NEES and EUA deal ultimately led to share price performance below the index, perhaps due to difficulties meeting merger synergy expectations. Only nine transactions have been seen as value-creating from two weeks before deal announcement, through a year after announcement. The market is tough on M&A transactions; expectations, once set, need to be met.
More formalized approaches to integration of repeated M&A transactions may be needed to ensure more value creation in the future, as consolidation continues. Experience in other industries shows that real value, and strong long-term competitive positioning, can result from building a well-oiled and smoothly functioning "acquisition engine"-the ability to acquire a series of companies, businesses, and assets, and to integrate them effectively and quickly, i.e. in a value-creating manner.
Simply knowing that integrating repeated M&A transactions is a developed competency creates value-Wall Street will recognize and reward a company's strong integration track record. The company can be confident that, if value-creating targets can be found, and the right price and other terms negotiated, the next deals will go smoothly. Regulators will be comfortable that this company knows what it is doing, improves value for customers as well as shareholders, and has an acceptable success record. And selling or merging companies will know that the company will treat their people and customers fairly and quickly.
A key to such success is a systematically applied approach to acquisition integration, building on clear corporate and business unit strategies and culture, the lessons from prior transactions, and a structured methodology supported by the right tools.
The Nature of Utility M&A
"One-off", not repeated, transactions have characterized much utility M&A activity over the last 5 years. In the first half of the 20th century, utilities often completed one deal after another. Today, few utilities use clear "roll-up" strategies. Serial deals are much more common in other consolidating industries-think banks, insurance, airlines, and a multitude of manufacturing and services sub-industries. In energy, DukeSolutions was on a roll-up path with its assembly of ESCOs, until it was sold to Ameresco. The prime regulated utility example is perhaps National Grid, with