June 1 , 2002
Business & Money
techniques include the use of various joint venture ideas, more direct approaches to engaging counterparties in merger discussions, and value bridging securities and transaction pricing.
Furthermore, and perhaps more important, consolidation activity would increase as public policy-makers recognize, or are educated by industry participants as to the benefits of industry consolidation, and a supportive merger policy could then be pursued in response to the 2003 Northeast blackout. It would be difficult, however, to have a high expectation for any such support to develop, even though equitably controlled consolidation generally should be viewed as fully consistent with public policy objectives of industry regulators. In particular, mergers that are properly structured should create entities that are strong financially and better able to serve ratepayers and invest in systems. Moreover, a private entity with responsibility for a broader region should be able to plan for reliability and investment in a more coordinated and comprehensive way (as compared to the multiple private and not-for-profit entities doing so today).
Finally, in some cases, CEO succession issues could reasonably be addressed as part of mergers that otherwise make economic sense. In this regard, a large number of industry participants are currently, or will be shortly, engaging in a change at the CEO level. Moreover, surveys conducted on the topic of industry consolidation, together with formal and informal dialogue on the topic, strongly suggest an acknowledgment among many in the industry that substantial consolidation activity is more likely than not.
A well-structured merger in the industry and with a sound industrial logic should be accepted in this marketplace. If such a "break-out" transaction is announced in the current environment and is, in fact, well received, it should act as a catalyst for renewed consolidation activity. This should be particularly true in areas of the industry where there is pent-up strategic demand. Chart 3 illustrates a selection of factors that have had, or are having, a material impact on the industry, together with realistic strategic courses left for industry participants.
Possible Continued Impediments to Consolidation
Although many factors suggest a resurgence of industry consolidation, other factors suggest that industry consolidation will not resume. For example, many strategically logical transactions in the industry are best structured as merger-of-equals or modified merger-of-equals transactions (i.e., a transaction where no, or only a modest, premium is being paid). For example, if a merger is between two similarly sized parties and is driven by cost savings, each party may find the merger most interesting if the shareholders of both entities "share the premium"-that is, since no shareholder group is receiving a premium, each group shares pro rata in the financial benefits of a merger. In the case where a merger is structured as such, it is most typical (albeit not required from a legal or financial point of view) to split in an equitable way things such as combined company headquarters, utility subsidiary headquarters, board representation and, most importantly, combined company leadership.
While the treatment of these so-called social issues is particularly difficult in all industries, the impediments may be particularly acute in the utility