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Fulfilling the Value Proposition

The Next M&A Wave: If mergers are once again a potential strategy for accomplishing growth objectives, the previous round of transactions offer several lessons.

Fortnightly Magazine - May 2005
Figure 5 - Sourcing EPS Contribution

enhanced when all facets of deal value are considered.

None of the above matters, of course, unless the identified value actually can be captured and converted to new cash flow. Fortunately, the fact that utilities fit together more seamlessly than industrial sector companies typically do, , very parallel structures and business mixes, has benefited the sector. Managements have been better able to capture the identified savings because the degrees of freedom in decision-making are practically reduced. It is not necessary to redefine the business along dimensions that are intended to conquer new markets, introduce new products, or revolutionize technology. Simply integrating the business efficiently and effectively will suffice. This is a principal reason why utility mergers are generally more successful than transactions in other industries.

Consequently, the financial community both recognizes the past successes of prior managements and expects that current managements will fully achieve, if not exceed, the level of synergies they announce.

Delivering on the Promise

Figure 6 - Transaction History and IOU Reductions

Compelling strategy, disciplined pricing, promising synergies, access to talent, and attractive financial outcomes can all generate enthusiasm for a proposed merger. However, none of these attributes influences the results of a merger more than how well companies can execute on business integration and value realization.

Delivering the full expected deal value is highly dependent on three fundamental activities. First, thoughtful planning time needs to be invested upfront in defining how to integrate the companies and what approach will be adopted to combine stand-alone operations. Although many companies tend to focus on getting the deal announced-and sometimes completed-before considering integration objectives and the shape of post Day 1 operations, the relationship between back-end success and front-end planning is directly correlated. Understanding the size, complexity, and pitfalls of integration before the process is undertaken is a hallmark of effective risk mitigation rather than simply a premature exercise in preparation. Starting early, as part of the due diligence process will pre-position the companies for integration with a thorough understanding of objectives, requirements and options.

Second, the companies need to establish clear and acknowledged leadership accountability for the outcome. While it takes a collective management effort to accomplish comprehensive operations integration, it is personal passion that drives performance and results. A committee of the many is far less effective than the responsibility of the few. When leadership accountability is vested in one or two responsible executives who view their single purpose to be producing the best results for the enterprise, then internal positioning distractions are minimized and merger outcomes become more certain.

Third, ultimate merger success is all about disciplined execution. Elegance in integration process design and planning is far less important than combining good plans with committed management to produce targeted results. Mergers that do not perform as planned typically fall victim to indecision, compromise and indifference. These fatal flaws can be avoided by adopting a rigorous process for managing results and focusing relentlessly on task-by-task performance.

There also will be opportunity to exercise creativity through the integration process. Capturing selected benefits even before closure is possible through joint ventures and contract arrangements, although these paths need