Can consolidation create sustainable long-term value, or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
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.
growth will require companies to pursue a number of simultaneous strategies:
- Build the rate base to meet supply security and reliability concerns;
- File for new rates to match current costs and recover past attrition;
- Attack all costs to reduce the rate of growth and minimize fixed costs;
- Simplify the business to remove unnecessary costs of differentiation;
- Deploy capital effectively to improve investment productivity;
- Reshape regulatory policies to provide for current investment recovery;
- Develop the top line to create new revenue sources; and
- Play the M&A card to capture earnings from consolidation.
Companies cannot safely conclude that promised growth can be achieved either organically or operationally. Accordingly, M&A is more than just an adjunct strategy, it has once again come center circle as a real, viable, and necessary method of capturing earnings potential. -T.F. and B.K
Mergers between utilities have been a principal strategy for growth, but not always with intended results.
Given the shaky financial standing of the sector, the last few years have produced little activity in the area of equity transactions. Most deals have been conducted around assets like power plants, pipelines, storage, and isolated pieces of operating properties.
In the not-so-recent past, however, equity transactions eagerly were awaited by Monday-morning financial headline readers. Over the period 1995-2000, almost 50 domestic stock transactions were announced affecting electric U.S. utilities. In addition to domestic mergers or acquisitions, a number of U.S. companies announced international transactions in Great Britain, Australia, Brazil and other far-flung locations. And, coming back across the waters, several international acquirers established beachheads in the U.S. sector.
At the early stages of consolidation, companies were driven to prepare for the widely anticipated deregulation and unbundling of the industry, leading them to consider the adequacy of their scale and the depth of their capabilities for successful navigation of more competitive waters. This also precipitated the roll-up of some entities and the regionalization of companies. Figure 6 illustrates the number of announced electric stock transactions that occurred through this time frame, along with the number of remaining electric U.S. utilities.
This figure clearly indicates that transactions tend to come in waves as market conditions, financial positions, competitive realities, regulatory changes, or management attitudes dictate the specific circumstances surrounding industry consolidation. Interestingly, the high-water mark for transactions in the United States was 1999, well after the first wave of combinations driven by readiness for competition. This succeeding wave of transactions, however, was not a product of new or uniquely different circumstances. Many of the transactions of the late-1990s were initiated because companies had an opportunity to view the results of those preceding combinations and were more comfortable with the indicated outcomes.
Both waves of previous consolidation reflected a sentiment among utility managements that stand-alone survival was not assured or, similarly, that success was more likely with a larger, more stable, and diverse portfolio. The combinations that occurred over the 1995-2000 time frame changed the landscape of the sector and reshaped the list of top 10 largest companies. The new entries to that list have largely continued to increase