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Winning the Merger Game

A new wave of consolidation is coming. To succeed, a company must understand where its strengths are.

Fortnightly Magazine - March 2006

provide attractive rates of return on T&D operations.

Fuel diversification. Those that possess superior operational and risk-management capabilities might acquire assets that enable them to meet regulations on CO 2 and mercury, as well as other environmental restrictions. They also might acquire assets that reduce their reliance on gas or other fuels that are subject to significant price volatility.

The U.S. power industry will become increasingly dynamic. The universe of possible asset configurations will change, and the opportunity to participate will shrink rapidly as companies begin to strike deals. Companies that have not played a major role in the past might now enter the industry and compete for acquisitions, complicating the picture.

As more buyers compete for a limited number of assets, the price of these assets is likely to increase, which is sure to have a negative impact on acquirers’ returns. To survive and thrive in this new environment, companies should act resolutely to shape the industry, rather than letting the industry shape them.



1. Our research used market value-added (MVA) to determine the amount of value companies created in the power industry. We define MVA as the difference between the market value of equity and the book value of equity at the end of a period, divided by the market value of equity less the book value of equity at the beginning of a period.

2. Under PUHCA, it was virtually impossible for companies to conduct M&A across regions unless the operations of the companies involved in the deal were “physically interconnected or capable of physical interconnection.” This was a significant impediment for utilities that wanted to acquire regulated assets located outside their area of operations.

3. Our analysis shows that acquirers did generate a majority of the MVA in the industry, even over a three-, five-, and ten-year period.

4. To quantify the total value created in the industry, we calculated the value added to the market by the 57 companies included in the S&P utility index between September 1995 and September 2005.

5. We define “M&A intensity” as the company’s total investment in M&A divided by its average enterprise value. “M&A-intensive” companies have quotients that are equal to 30% or more. Companies were counted as pursuing M&A during this period if their quotient was 10% or more.