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this will make some transactions more difficult because of earnings-per-share dilution pressures associated with larger equity components and increased transaction complexity.
Furthermore, the restructurings and balance sheet rehabilitations over the past 18 months have allowed the industry to move out of a crisis stage. In that regard, many companies previously in a crisis or near-crisis situation are now in a position to exercise strategic leverage in transactions should they choose to pursue this course. However, while it is difficult to imagine the next crisis for the industry, it is equally not beyond the realm of imagination for another crisis to emerge, especially as the next cycle of maturities comes due in 2005-06 and beyond, especially in the case where industry fundamentals have not improved. New industry crises, albeit unexpected, could impede consolidation activity. As noted above, a "break-out" transaction could act as a catalyst for consolidation activity. Similarly, the absence of such a transaction may have the effect of stalling a revival of activity to the extent industry participants are concerned about testing this marketplace and regulatory environment.
On a somewhat related point, commentary from some academics and consultants suggest that most mergers have not created shareholder value. This generic commentary, which has become part of the refrain across all industries when mergers are discussed, may discourage industry consolidation. However, when utility and power industry participants consider the economic benefits of bringing logical industry partners together, a focus on why many of the mergers of the 1990s went bad (deal hubris, bad deal pricing, failed industrial logic) and a focus on avoiding mistakes of the prominent case studies may allow industry participants to be more comfortable with consolidation.
Although the potential repeal of PUHCA has raised the question of its effect on consolidation activity, such activity should not increase materially in response to repeal. Nonetheless, one should expect that industry consolidation will accelerate, and that it should do so since the benefits of consolidation to all constituencies are so compelling if transactions are properly structured. Moreover, the 2003 Northeast blackout has the potential to change the environment substantially (although it is too early to predict the means by which it likely could impact the environment), especially if regulators begin to identify mergers as a way to make the industry stronger. Material impediments still remain to consolidation activity in the industry, however, and these impediments could continue to chill consolidation.
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