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Consolidation in the
Utility Industry
Successful Mergers and Acquisitions require C-level
commitment to realize savings, reduce risk and
capture the cash
Most people would never consider Most of these crashes could have been
merging onto a crowded highway avoided if executives had used an “on
without an on-ramp, but many CEOs ramp” onto the M&A highway instead
are doing precisely that when they of driving recklessly. For many utility
enter the Merger and Acquisition executives, Business Process
(M&A) process. Outsourcing (BPO) can be the on-ramp
to successful M&As, paving the way to
Studies show that 50 to 80 percent of reduced risk, locked-in ROIC, investor
all M&As fail to deliver the value confidence and long-term share-
promised because executives are not holder value.
looking at the oncoming traffic of a
newly merged company. This results in Despite the number of failures, M&A
decreased or flat profitability for the activity, both in terms of deal numbers
new company — most evident when and value, is increasing. Even though
year-end cash balances fall short of the utility industry is performing
anticipated synergy savings. well in the market, executives
recognize the necessity to continue
M&As fail for a variety of reasons, to increase shareholder and customer
including: value through cost reduction and
revenue growth.
Cultural incompatibility, change
management issues, organizational Transformational M&A in today’s
confusion and division favorable utility investment
Overestimated synergies and environment can provide the
insufficient focus on growth and opportunity for forward-looking leaders
revenues to achieve both faster growing revenues
and streamlined operations.
Inadequate emphasis on speed,
leading to loss of integration
But these business benefits cannot be
momentum
achieved without the commitment of the
Flight of talent and knowledge capital C-suite to transform the quality and
or inability to transfer skills across reliability of business processes.
organizations
This means that executives must not will be necessary to create new energy
only develop a plan for cost savings sources, a more reliable grid, and better
and allow operating management to customer service. Given this more
focus on core operations, but they must attractive investment environment,
also commit to an approach that will fewer organizations have the
enable them to take full advantage of opportunity to improve their
today’s M&A marketplace. Large scale infrastructures, thus improving
BPO is that approach. reliability — essential to prevent
brown-outs or blackouts.
For the utility industry, the business
environment and timing are optimal for C o n s o l i d a t i o n i s h e re t o s t a y f o r
M&As. In the following pages, we’ll years to come
examine the current M&A climate and In the U.S. today, there are more than
how executives can best succeed in it. 3,000 electric distribution companies,
more than 500 transmission
Energy Reform Favors companies, and hundreds of electricity
Consolidation generating companies. The simple fact
The 2005 repeal of the Public Utilities is there are too many regional,
Holding Company Act (PUHCA) has undercapitalized companies that lack
dramatically improved the investment the resources to lead the charge in
landscape in the utility industry. By consolidation. The utility landscape of
eliminating long-standing laws and the future will support only a smaller
regulations that have limited growth number of larger, stronger, better
P ro v i s i o n s o f t h e E n e r g y opportunities, provisions of the Energy capitalized companies. Companies that
P o l i c y A c t o f 2 0 0 5 a re Policy Act of 2005 are encouraging are unable to grow will become
visionary leaders to look for growth memories.
encouraging visionary through consolidation. Such growth
l e a d e r s t o l o o k f o r g ro w t h
t h ro u g h c o n s o l i d a t i o n .
Global Electric & Gas M&A
600 250
500
200
Number of Deals
300
100
200
50
100
0 0
2
Outsourcing Services the way we see it
Consolidation Requires a
Commitment to Execution
By eliminating geographic and
operational restrictions, the repeal of
PUHCA further stimulates industry
consolidation by opening investment Many mergers, however, result in
opportunities to new players. For disappointing financial returns and
example, a public utility holding disgruntled shareholders, employees
company’s service area does not need to and customers. To benefit from
consist of a single integrated system. perceived economies of scale and cost
Companies with connecting networks savings, these companies must address
can now become merger partners. two fundamental challenges. First, they
Utility companies are freer to improve must resolve the complexities of
or deepen their commitment to core combining the operations and
operations. They can now develop maintenance functions and the “back
nationwide integrated strategies, shed office” support services of two or more
“vertical” services and acquire companies into one integrated and
additional resources to become larger, smoothly running operation. And
“flatter” organizations focused on second, they must devise a workable
increasing scale and revenues related to plan for combining disparate corporate
generation capacity or transmission cultures into a new culture appropriate
facilities. for the consolidated entity.
4
Outsourcing Services the way we see it
6
Outsourcing Services the way we see it
Moving Forward specific experience to help address the Trusted Partner. Capgemini is the
Energy reform has helped clear complex business issues that results-driven business partner trusted
construction on what promises to be a executives face. by leading companies. For TXU,
busy highway of M&A activity in the transformational business process
utility industry. In fact, circumstances Global Outsourcing Leader. Capgemini outsourcing with Capgemini has led to
have never been more favorable for is the global leader in developing more responsive customer service, a
consolidation. As the traffic builds, closer, more effective, trust-based substantially reduced debt load, a much
some utilities using the uncontrolled outsourcing relationships that deliver more efficient cost structure, and
approaches of the past, will inevitably better, faster and more sustainable significant gains in shareholder value.
crash. Meanwhile, other companies, results. No other service provider Through distributed delivery, new
taking advantage of the “on-ramp” matches the range and flexibility of technology, and more consistent end-
approach of BPO, will merge smoothly Capgemini’s intelligent mix of solution to-end processes, Capgemini is helping
and successfully, achieving lasting portfolio, commercial model or delivery TXU and other utility companies to
business benefits and sustained location options. Capgemini’s transform their businesses.
shareholder value along the way. innovative Rightshore™ approach
means having the right resources, in
Why Capgemini the right location, and at the right cost.
Industry Expertise. With more than As our clients’ needs change, we
10,000 consultants dedicated to energy, provide flexible and scalable solutions
utility and chemical projects across through over 100 integrated delivery
Europe, North America and Asia centers globally.
Pacific, Capgemini brings industry-
amin.bishara@capgemini.com eric.schmitt@capgemini.com