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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

by reducing pricing uncertainty. A 1 to 3 percent reduction in the value paid for an acquisition is not unreasonable, representing from $10 million to $30 million per billion dollars of enterprise value.

All Processes Are Not the Same

Two factors drive the realization of operating synergies in a merger. The first is absolute value creation potential. The second is the ability to transfer superior operating performance to a target company rapidly and efficiently. Each process has different cost, performance, and skill characteristics—and hence, differing operational improvement and transfer behaviors. In our experience, procurement and IT capital spend are the highest priority areas to capture meaningful near-term cost synergies. This is then followed by overhead consolidation, which, while typically easy to transfer in concept, represents smaller dollars and often gets compromised by internal political issues or significant severance costs.

Generation operation also is an area with significant potential. A superior operator can bring meaningful enhancement to fuel procurement, non-fuel O&M, and capital investment. Critical to success, however, is a leadership bench to infuse in the acquired company and a technical platform, particularly work management, to improve work scheduling and prioritization. Nuclear consolidation strategies have demonstrated this potential.

Field operations and asset management—involving the core T&D business—are the two high-potential value areas most difficult to unlock. Improving T&D performance, excluding union constraints, typically requires a strong work management and scheduling platform, as well as significant cultural and performance management changes. Improved T&D productivity is driven not only by technology and process changes but also by migrating to an accountable performance culture with in-the-field supervisors, improved work force planning, and targeted performance incentives. Asset management can be improved in the short term through attention to capital prioritization, but long-term improvement requires information platforms that, while recognizing significant activity in this area, typically are inadequate today for most utilities.

Driving the Acquisition Platform

Having a good understanding of value sources and a well-defined acquisition business model is not enough to ensure success. Merger companies still have to turn the plan into reality. Acquisition leaders across all industries possess two critical capabilities. The first is a designated, experienced M&A organization. The second is an execution playbook that translates the theory into tactical guidelines and practices that move from target selection through transition and stabilization to full integration.

Several dynamics must be in place within the acquiring company for an internal M&A team to flourish. The first is building a dedicated team within corporate strategy with strong integration with the finance organization. The team should be flexible and easily ramped up and down, with a core team and an extended deal team identified and trained. The core team should blend internal and external expertise, have permanent operational expertise, and be strongly integrated with the finance department. The inside/outside team requires veterans of the acquiring company who are experienced with both the strategic and operational challenges that confront the business and outsiders (both external hires and third parties) who have seen similar challenges under different scenarios. Ideally, the staff would offer perspectives from past deals or have operational