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M&A Value Creation: Combating the "Winner's Curse"

Significant value waits to be unlocked through consolidation, but conventional approaches have been inadequate.

Fortnightly Magazine - October 2006

experience working on integration matters in specific functional areas. They should be able to adapt this experience to the value drivers of a particular deal.

The M&A playbook includes customized integration methodologies, performance metrics, tools, and templates that are tailored to the acquiring company’s needs, and can be applied in a manner consistent with the value drivers of a particular deal. A key component of the playbook is a diagnostic tool, giving the acquiring company vital leading indicators that signal a deal’s complexity before entering the due diligence phase. While the diagnostic should not be seen as replacing due diligence, its purpose is to provide an important barometer of potential downstream integration challenges when there is still time to influence the terms and conditions or, if warranted, walk away from a deal. The diagnostic tool typically includes a series of a function-specific decision-tree analyses designed to zero in on the ramifications of most likely trouble spots in the integration effort.

Most important, the playbook enables executives to maintain focus and keep their eye on the “value ball.” By building a repeatable and scaleable process tailored to a company’s needs, the executive team is led through the steps and questions that help it to focus only on those activities and functions that drive value realization, while postponing others. Finally, an M&A playbook is a living set of documents and methodologies. It is important that with each successive analysis or integration, the lessons learned from previous initiatives are incorporated.

Do you build and buy? Buy and transform? Or buy and simply combine and hold, transforming much later? Our view is that because of the reliance on operational synergies to drive value, utility acquirers should focus on selective transformation before an acquisition and consider change programs in high-impact functions as part of merger integration. Assuming an organization has about a 24-month window for accepting major change, taking measured risks, and selectively transforming as part of the merger integration process, while seemingly aggressive, can pay big rewards and put the newly merged utility on the path to high performance. However, do not try to change everything. Rather, focus on high-impact areas that will be competitive differentiators for the combined company.

We recognize the challenges of pursuing change programs both before, and as part of, acquisitions. In the end, current performance levels and acquisitive aspirations will affect platform priorities and design. In addition, the possibility of acquiring superior operating platforms is a consideration. The right path forward—the right balance of business transformation and M&A—requires a deep understanding of change readiness and the capabilities required to support the company’s competitive strategy. The time to consider these issues is before the acquisition, not during integration.

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