Significant value waits to be unlocked through consolidation, but conventional approaches have been inadequate.
Jim Hendrickson is a partner with Accenture. Contact him at 305-978-8182. Robert Laurens is senior executive in Accenture’s utility group focusing on integration. Contact him at 404-386-1093. Andre Begosso is senior manager at Accenture’s Strategy practice.
The basic fundamentals for utility industry consolidation are strong. The industry is fragmented, notably in North America, but also in the UK, Australia, and Brazil, and cost pressures are escalating. These factors, coupled with limited alternative growth options, are increasing merger and acquisition (M&A) activity as an important industry top-line growth driver. However, significant uncertainties remain. Can consolidation, no matter how intuitively attractive, create sustainable long-term value? Or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
Value creation from an acquisition is not a given. The “first wave” of whole company mergers (1997-2004) produced mixed to disappointing results. In the majority of major acquisitions, positive value was not created in the first two years and was seen only after an average of four years. Systematic overestimation of strategic and operational synergies, particularly in the heat of “bidding wars,” led to excessive price premiums and elongated payback periods. To some extent, an acquisition entailed a “winner’s curse.”