Any executive who has gone through a merger, however well planned and executed, knows that it is a challenging process. Two essential ingredients are required before merger discussions can proceed from the initial "what if" stage to agreement on all critical and strategic issues. These ingredients must be developed by the chief executive officers through face-to-face meetings and a combination of intuitive response as well as specific examination of strategic issues. The two ingredients are early agreement on and understanding of the underlying principles that will guide merger discussions, and the development of a level of trust that permits full discussion of all important issues.
The merger discussions between myself and Stan Bright moved rather quickly through the development of trust and an agreement on the principles that would allow us to achieve a merger of equals. In general terms, the principles that guided our discussion included the concept of a strategic alliance through a merger of equals, a plan for corporate governance, a plan for management succession and transition, and a commitment to maintaining a corporate presence in our key communities.
The merger discussions that followed the development of principles were not always easy, but we moved forward knowing that we could compromise on nonstrategic issues without requiring compromise by either party on the principle issues. We were guided by a common goal: to create a new company that would be stronger than either of the predecessor companies and have greater potential to prosper in the coming competitive utility business.
Synergies Too Good to Resist
It was clear from the beginning of our discussions (em indeed, it was part of what prompted them (em that there were enormous potential synergies to be gained by merging our two companies. We had contiguous gas and electric distribution service areas; joint ownership interests in four low-cost, and environmentally clean coal-fired power plants with common transmission assets. We could eliminate duplicate functions, defer capacity additions, and reduce fuel and natural gas costs through greater purchasing power. We could, in fact, save the combined company as much as $500 million over 10 years.
Moreover, these potential synergies underpinned a strong, five-part "stakeholder" case for the merger:
s It would create a larger, financially stronger company, one better positioned to attract the capital investment for future growth.
s It would provide opportunity for added shareholder value through increased efficiency and reduced or avoided costs.
s Customers would benefit from the merger-related synergies and attendant cost reductions that, over time, would help keep future rates low.
s The new company would have a more diverse base of industrial, commercial, agricultural, and residential customers.
s The new company would be better positioned to take advantage of future strategic opportunities in nonregulated ventures.
Management: Structure and Succession
A new board of directors and an order of management succession were needed to transform our concept of a strategic alliance into a workable reality.
About half of our projected $500 million in merger savings would be achieved by eliminating duplication in the combined employment levels of both companies, so we applied that approach from top to bottom, beginning with our board of directors. The total number of directors of Iowa-Illinois and Midwest Resources is 23, with four from inside the two companies and 19 from outside. The two boards of directors have agreed that after the merger becomes effective, the MidAmerican Energy Co. board will have no more than 19 directors (em 17 outside and 2 inside. They further agree that by mid-1997 the new company will have no more than 16 directors (em a reduction of 7, or 30 percent.
Consistent with the strategic merger of equals concept, and to provide senior management continuity for the new company, we agreed to a plan of succession as an integral part of the merger agreement. The transition mechanism we chose to implement that plan was the "Office of the CEO."
When the new company is formed, Stan Bright and I will share executive responsibilities in the "Office of the CEO" (em he as president and I as chairman. Our merger plan defines each of our specific responsibilities during the transition period. At the end of the first year of operation, Stan will become CEO, and I will continue as chairman of the board until I retire in May 1997.
We chose a "business unit" approach to MidAmerican's management organization to position the gas and electric operations and InterCoast Energy Co. as competitive stand-alone businesses (em a strategic decision that allowed us to locate them in the three major communities in Iowa that we serve. Doing so was important because it demonstrated our continuing commitment to maintain a significant corporate presence in those communities and to provide stability for a greater number of employees than would relocation to a single location.
While we expect the electric business unit will initially be vertically integrated, our structure provides the flexibility to disaggregate it if we desire. Any changes will depend ultimately on how the competitive industry evolves, and which structure will best suit the demands of the marketplace.
MidAmerican and its nonregulated subsidiaries will be headquartered in Des Moines, the state capitol. The electric business will be headquartered in Davenport, the Quad Cities area where Iowa-Illinois was located. And the gas business will be headquartered in Sioux City, on the western border.
The nonregulated businesses (em InterCoast Energy Co. (IowaIllinois) and Midwest Capital Group (Midwest Resources) (em are being reorganized and will operate as separate subsidiaries of MidAmerican. The businesses of InterCoast include all nonregulated activities not related to service-area business development. These include oil and gas acquisitions, development, and production; nonregulated energy services, such as power marketing; and financial investments.
Midwest Capital will be a regional business development company, retaining Midwest Resources's business development projects. It will also hold and manage the loans, obligations, properties, and financial investments associated with economic development for Iowa-Illinois. Our business development efforts will continue as a key strategy for growth in our service territory.
Our best estimate of the time needed to complete the merger was 12-18 months. We expected that period would be required to obtain necessary approvals from the two companies' shareholders and from state and federal regulatory agencies. In fact, we managed to secure all the necessary regulatory approvals (em with the exception of that of the Nuclear Regula-tory Commission (em in a little less than 11 months.
To ensure the support of shareholders, employees, and customers, we developed communica-tion plans to keep each group informed of the latest developments. Key constituents were further segmented to create an extensive list of state and local officials, our respective state Congressional delegations, and business leaders in our headquarters communities.
We recognized that employees, in particular, would require information on a regular basis and that they should receive merger news quickly. We created an employee phone-in inquiry service with daily responses provided by companywide electronic mail and a twice-monthly employee newsletter devoted exclusively to merger-related articles.
Stan and I have also been involved in numerous meetings with equity analysts, business writers, utility industry groups, and civic and business leaders. We will continue to ensure that our principal constituencies are kept informed of the merger's progress and the benefits we expect to achieve.
Creating a New Company
Our goal was to create a new company, rather than simply put the two companies together. The creation of a new organization is a unique opportunity (em one that could take years of study if the time were available. We gave ourselves 10 months to do this job.
Why the hurry? Mergers by their very nature breed high levels of uncertainty and insecurity among all concerned (em managers, employees, shareholders, suppliers, and so on. These uncertainties, over time, can have potentially adverse effects on morale, operations, safety, efficiency, and service. We needed an approach that would quickly identify the vital factors and considerations involved in merging, sort them out area by area and function by function, and provide the basis for the development of informed recommendations. The mechanism we selected was the "Corporate/Utility Transition Team."
In early August, less than a week after our announcement, we appointed an eight-member (four from each company) Transition Team of senior managers. A key job for the Transition Team was to recommend organizational structures for the new company. To do so, the Transition Team formed 16 sub-teams to recommend management structures for the following corporate functions and operations:
s Corporate communication
s Corporate services
s Customer requirements
s Customer support
s Electric distribution
s Electric generation
s Electric integrated resources
s Electric transmission
s Finance and accounting
s Gas distribution
s Gas supply
s Human resources
s Information systems
s Law and regulatory affairs
s Materials and supplies.
The merger process occurred in three stages: analysis, planning, and implementation. The sub-teams played a vital role in the first two. The Transition Team then used the sub-teams' work to develop implementation plans, which will be used by the new MidAmerican management team. Implementation will begin when the merger receives final approval.
The sub-teams' first step was to talk with our customers, who told us about their current and future energy service needs. Our job was to build an organization to meet those needs. The sub-teams, operating within tight time constraints, were expected to look at the most efficient way to accomplish the scope of work and determine the optimal methods of operations, staffing, facilities, and support. We encouraged creativity because we did not want to end up with an organization that did everything the old way. We received plenty of originality and creativity; not every suggestion was adopted, but the result is a management organization at MidAmerican Energy that will be as lean and efficient as that of any U.S. utility. t
Russell E. Christiansen is chairman, president, and CEO of Midwest Resources Inc. and its utility and nonregulated operations.
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