Measuring the Merger: Fact, Fiction, and Prediction

Fortnightly Magazine - October 1 1996
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Some shareholders do find bottom-line value

in a "marriage of convenience."

With six merger and acquisition (M&A) deals announced between May 1995 and January 1996, and three more so far this year, the long-predicted consolidation of the electric utility industry is taking hold. At least 23 utilities, with business-combination transactions pending, are part of the frenetic domestic M&A activity that has swept the industry. With over 150 major players in the industry, expect swift consolidation, especially on the electric side (em deals of all shapes and sizes, not just the traditional mergers of the past.

The Table below presents key information on selected mergers announced in 1995 and the first seven months of 1996.

The merger participants are generally low-cost providers with similar cost structures (see Graph 1).

s All eight transactions involve at least one combination or gas company.

s Five pair a company with nuclear operations with a nonnuclear company (a significant shift from the past, when the electric industry was basically divided into nuclear and nonnuclear groups).

s All the mergers are structured as stock-based, tax-free transactions, and six expect to be considered as pooling interests. (Stock exchange ratios for three transactions precluded any premium offers at the announcement date; market premiums for the other five averaged 27 percent, with premium offers ranging from 11 to 48 percent.)

s Four of the newly merged companies expect to become PUHCA registered companies. (None are currently registered under PUHCA.)

s Six of the transactions merge an electric company with a

combination or gas company, enabling the combination company to expand its gas services to a new customer base.

The first six transactions presented above have many common characteristics. The merging companies in general display similar cost structures and relatively strong competitive positions. All but Public Service of Colorado and Southwestern Public Service have contiguous service territories.

The last two transactions (em the Texas Utilities acquisition of the gas distribution and pipeline company ENSERCH Corp. and Enron's acquisition of Portland General Corp. (em differ significantly from the others. They represent the first of many "deals of the future" expected from converging energy markets. Analysts, however, disagree over Enron's ability to achieve its plan to make Portland General Corp. a regional player.

Great Expectations:

Merger as Strategy

Although merger participants cite increased shareholder value, improved competitive positioning, and reduced costs as the chief benefits of their respective deals, other driving forces include:

s Increased prospects for growth in both revenues and earnings

s Potential for sharing of merger savings

s Horizontal integration in preparation for possible vertical disaggregation

s Strengthened financial condition and flexibility

s Diversified business risks (generation, customer mix, load patterns, and regulatory jurisdictions).

Nevertheless, a section in NIPSCO Inc.'s Annual Report, "Where Have All the Flowers Gone," critiques the rationale for recent mergers:

"When competition upset the formerly regulated worlds of banking, railroads, and airlines, the response was inevitably merger. Bigger must be better. Better must be bigger.

One hundred major railroads collapsed into fewer than 10. Several hundred of the largest banks disappeared into a handful of huge bank