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Repeatable M&A: Creating a Value Chain Reaction

How building capabilities for repeated M&A can increase shareholder value.
Fortnightly Magazine - April 15 2002

its string of back-to-back acquisitions in the Northeast. NiMo is now being integrated into Grid's prior purchases of NEES and EUA. Yet, as indicated, the first two deals have not yet proven to be value-creating.

Others have done several deals, but which of them is a rapid-paced roll-up with a clear and continuing acquisition and integration program designed to increase value quickly?

Energy East grew from its base in NYSEG through acquisitions of gas and electric properties in Maine, Connecticut and Massachusetts, and has a pending deal with RGS.

FirstEnergy's acquisition of GPU continued the M&A activity that originally formed FirstEnergy. Similarly, in a short period of time, FE's FirstEnergy Solutions unit acquired 11 mechanical contractors offering energy services.

Xcel's emergence from the NSP-New Century Energies transaction continued the earlier creation of NCE from Public Service of Colorado and Southwestern Public Service.

Another common pattern of recent M&A activity is "1+1 = slightly more than 2" transactions among more-or-less equals. Examples include "one-off" transactions such as the ComEd-PECO merger that resulted in Exelon, the creation of Progress Energy from CPL and Florida Power, the failed attempt to merge Entergy with FPL, and DTE's acquisition of MichCon. Several of these companies are interested in further acquisitions, but none has happened yet. So there is no clear track record of repeated successes.

AEP and Duke have pursued a different, potentially transformational, approach to M&A. Each has completed multiple M&A transactions to drive an expanding and increasingly integrated range of energy transactions. (see Table 2) Duke, especially, has made extensive efforts to develop new sales and profit streams from new products and services enabled by integrating its related businesses.

Regardless of their strategy, most utilities have not yet developed formal systematic capabilities for repeated success at doing M&A deals and at rapid integration once each transaction closes. This very lack of repeatable capabilities surely contributes to the market's skepticism about energy M&A.

Because the last, or the next, deal may not ensure continuing survival, emerging successfully from the next M&A wave demands the development of repeatable M&A skills. And the next wave will likely lead to future waves as the industry's evolution continues. So long term survival means learning how to rise above the many perceived, and very real, problems and issues in both doing and implementing a continuing series of transactions.

Typical Deal Problems

Much is known about why doing a single M&A deal is difficult, let alone doing a series of deals. Common process problems in managing an end-to-end transaction include:

  • Unclear vision of what the acquisition/merger is supposed to achieve;
  • Inadequate review and absorption of hard-won lessons from prior deals;
  • Rushed timeframes driven by pressure to close;
  • Insufficient analysis, and thus insufficient preparation for integration;
  • The inevitability that some important aspects of a company will become evident only well after the deal closes;
  • Insufficient executive time and attention to resolve conflicts and provide clear guidance;
  • A revolving door of people working on each deal team;
  • Ineffective management processes for managing the entire transaction from end to end;
  • Unclear or incomplete action plans