Utilities that participate in a merger are just a likely to find revenues shrinking as growing, according to a recent study of completed and pending M&A activity among U.S. utility and energy companies.
The study, "Energy Utility Perspectives (em Creating Value Through Mergers and Acquisitions," conducted by Mercer Management Consulting, examines 43 completed and 53 pending U.S. utility deals conducted between 1985 and 1995.
In calculating the impact of the mergers and acquisitions, Mercer charted the compound annual growth rates of the utilities included in their study for both operating profit and revenue versus the Standard & Poor's utilities index. Of the 33 acquiring utilities (representing 43 deals), Mercer rated only 12 as successful in the sense of providing superior revenues and operating profit growth. Mercer found a "wide disparity in value" for shareholders of the acquiring utility. Growth rates for the 33 acquirers tend to cluster in four categories:
• Shrinkers. 21 percent of the utilities underperformed industry averages in terms of ability to generate revenue and profit growth from M&A activity;
• Cost-cutters. 12 percent held the line on profitability by aggressively cutting costs, but still saw revenues shrink despite acquisition play;
• Unprofitable Growers. Nine percent exceeded utility sector revenue growth rates, but could not translate their acquisition strategy into superior levels of profitability; and