Mergers and Acquisitions: Special Dangers and Opportunities
Collier, Steve, Management Quarterly
Unprecedented ownership restructuring is taking place in the electric utility industry. Mergers and acquisitions, two forms of restructuring, represent both strategic opportunities and threats for electric utilities. Our author discusses the reasons ownership changes hands, valuing companies, special cooperative attributes and circumstances, dangers for cooperatives, and most importantly, opportunities for cooperatives as it relates to increasing competition and the threat of involuntary ownership changes. This article stems from a presentation Mr. Collier made to NRECA's Advanced Management Program, Mergers and Acquisitions: Who's Going to Own Your System, in September 1993. INTRODUCTION
Profound changes in the electric utility industry are altering the factors which drive the expectations of both customers and owners. Increasing competition for customers causes pressure to lower price and increase service. This tends to reduce revenues and raise costs. Greater competition allows for less variation in prices and service quality among companies in the industry. Competition for resources (e.g., capital, land, fuel, environmental impact, etc.) complicates corporate planning and may further escalate costs. Regulatory and economic uncertainties further complicate planning and operations. These all have unavoidable effects on profitability and return on owners' investment. Some utilities are well situated for the new conditions while others are not. New competitors challenge even the most successful established companies. When these circumstances are coupled with ubiquitous and fierce competition for capital and return on investment in a market-driven national economy, changes in corporate structure, even ownership, are inevitable. While these phenomena are common to private enterprise throughout the United States economy, they are relatively new to the electric utility industry. Utilities had for a century operated as regulated monopolies serving a relatively inflexible demand and receiving revenues certain to exceed costs. Various events in the 1970s and 1980s and the ensuing actions of customers, owners, regulators and lenders have shifted, even destroyed that long-standing paradigm. Competition for retail customers, resources and even ownership of assets is now the prevailing factor in the industry.
Now, unprecedented ownership restructuring is increasingly commonplace among electric utilities. The changes in ownership range from distressed sellouts of companies unable to cope with new and ever changing paradigms to hostile takeovers of viable corporations. Deregulation and the resulting diversification and divestitures multiply the variations. Mergers and acquisitions represent both strategic opportunities and threats for electric utilities. The special attributes and circumstances of electric distribution cooperatives cause the opportunities and threats to be all the more important. Special care is necessary for cooperatives to withstand the dangers and, more importantly, reap the strategic advantages of mergers and acquisitions. THE TRADITIONAL PARADIGM
The late 1870s marked the advent of the electric utility company. An industry that began with largely novelty arc-lighting service in downtown urban areas and industrial centers expanded rapidly with a proliferation of technologies for generation, distribution and utilization of electricity. By the turn of the century, there were more than three thousand electric utility companies providing service throughout the United States.
The introduction of electricity in the United States had a revolutionary beneficial effect on the quality of life and productivity of business, leading to an almost insatiable demand lot increased generation and utilization. The industry grew in size by a factor of more than two hundred times from about three million kilowatts of installed capacity in 1900 to more than 600 million kilowatts by 1970. Technological advances combined with economies of scale led to declining real prices. …