A new wave of consolidation is coming. To succeed, a company must understand where its strengths are.
Peter Lorenz is a project manager in McKinsey and Company’s Houston office; Matt Pond is a McKinsey and Co. alumnus; and Thomas Seitz is a partner and the location manager of McKinsey’s Houston office. Contact Thomas Seitz at 713-751-4139.
The U.S. power industry is poised for consolidation. Regulatory barriers to mergers and acquisitions (M&A) are lessening, many companies now have the resources to finance acquisitions, and the industry is highly fragmented. Yet common wisdom says that M&A frequently destroys value. Several studies have concluded that most deals fail to generate the anticipated synergies.
There is no question that M&A is challenging, but we believe that these negative assessments are misleading. Analysts often account only for fluctuations in total shareholder return (TSR) that occur in the days or weeks following an acquisition or merger. This is an insufficient amount of time to determine success or failure, and most executives know it. Most senior leaders are concerned with companies’ longer-term prospects, not with short-term fluctuations in their stock prices.
Our analysis of the long-term performance of companies that have M&A-intensive strategies suggests that M&A can generate tremendous value. We found that companies that relied heavily on M&A generated more than half of the value1 in the power industry during the 10 years ending in September 2005.