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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

their market capitalization and are among the most highly valued today.

Not surprisingly, "conventional" thinking always has suggested that mergers seldom produce the results anticipated and that shareholders are better off without the risk and the headache. For sure, excessive premiums that create long-term anchors to the acquirer are difficult to overcome. Another potential drawback is that extended regulatory approval periods can practically "lock-out" other strategic initiatives of the companies if not anticipated.

The track record of the utility sector, truthfully, is mixed. Traditional analyses of relative stock price, shareholder return, and other value metrics do not uniformly produce positive results. Clear conclusions are difficult to draw from these analyses, however, because the impacts of M&A transactions are commingled with those from other non-merger events. Elements such as regulatory decision outcomes and general market conditions that are unrelated to a transaction can depress financial results and stock performance. These impacts may send misleading signals to analysts over how a merger is affecting value creation, particularly given the positive track record of the sector in realizing operational synergies.

Strikingly, one can point to several serial acquirers in the sector that have clearly been satisfied with the results they have achieved and hold attractive valuations today. These companies externally are viewed as being able to successfully execute on transactions through leadership commitment, management skill, and regulatory prowess in a way that demonstrably produces value. Of principal importance are the abilities to exercise discipline in pricing of the offer, to craft creative but equitable plans to secure regulatory approvals and to aggressively pursue expected results. -T.F. and B.K.