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THE 2005 ENERGY ROUNDTABLE. Domestic and International Energy Acquisitions that Create Value. Introduction. Organizations developing energy companies through M&A need to heed the high failure rates.

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THE 2005 ENERGY ROUNDTABLE

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THE 2005 ENERGY ROUNDTABLE

Domestic and International Energy Acquisitions that Create Value


Introduction

  • Organizations developing energy companies through M&A need to heed the high failure rates

  • M&A deals in the energy sector have experienced high failure rates, particularly the international deals

  • The performance profile of which deals are succeeding and which are not is unique to the energy sector

  • There are important lessons to extract from past energy M&A activity to better ensure successful deals going forward


Energy Deals

Like industry in general, less than half major deals create shareholder value in excess of their respective industry index

Source: SECOR M&A Database updated using Bloomberg


Highest Failure Rates

  • The highest failure rates in the energy sector have occurred in related diversification and international deals

Source: SECOR M&A Database updated using Bloomberg


North American International Deals

  • The poor performance of North American led international deals is common to other sectors

Rationale

  • NA acquirers tend to be more aggressive on price and less effective in execution

  • Most European acquirers have more international deal experience and manage culture issues more effectively

Source: SECOR M&A Database updated using Bloomberg, Dealogic, Bloomberg, Hoovers


Related Diversification

  • Normally related diversification deals have higher success rates and better returns than consolidation, but not so in the energy sector

Rationale

  • In general, high acquisition premiums more than off-set one-time cost synergies in consolidating industries

  • Revenue synergies in related diversifications are “the gift that keeps on giving”, when real

  • By contrast, premiums in energy consolidation have been more modest

  • Synergies have not materialized in related energy deals

Source: SECOR M&A Database updated using Bloomberg, Dealogic, Bloomberg, Hoovers *Estimate: based on weighted averages of US and Europe mix


Implications

Three imperatives determine successful deals

  • 1. Deal Logic

    • Path to long-term

    • strategic value

  • 2. Organization and

  • Culture Alignment

    • Structure, process,

    • Systems and culture

  • 3. Implementation

  • Management

    • Accelerate

    • transition and act on

    • strategic potential


Customers stand to benefit from combined offer

1. Deal Logic

  • Deal makers need to ensure that the logic cross-ocean and cross-sector deals is sound. For example, the multi-utility model has not yet proven itself.

Gas Distributors

Related fin’l products

Natural gas

Water supply

Electricity

Power Companies

  • Can the synergies be captured for shareholders


2. Organisation & Culture Alignment

Integration focus tends to be on organisation structure.

Failures are blamed on strategy execution or corporate culture

Strategy, Structure and Culture

  • Strategy

  • Business strategies

  • Implementation plans

  • Execution

Typical failures

Typical focus

  • Organisational

  • Structure

  • Reporting relationships

  • Roles

  • Competencies

  • Organisation

  • Culture

  • Values

  • Work rituals

  • Leadership

  • Organisational Structure

  • Reporting relationships

  • Roles

  • Competencies


3. In execution, the challenge is to sustain the focus

  • In international and cross-sector deals, much of the potential value has not been addressed.

Risks of Delay

Benefits of Early Action

Typical Post-AcquisitionImplementation Results(% of proposed value)

  • Time value of financial results

  • Expectation of change, need for direction

  • Time value of enthusiasm for identified synergies

Actions taken; synergies realized

Actions atrophied; Potential value ignored / forgotten

Actions ill-conceived, failed or deliberately abandoned


Summary

  • As the industry continues to restructure, companies need to improve the performance for shareholders

  • Those participating in in-market consolidation need to take care not to pay for all the synergy potential in advance

  • Those building multi-business or multinational companies need to reconfirm the logic of these deals. Will these strategies create shareholder value? From where specifically will the value be derived?

  • There must be a clear link between the deal logic, the action plan and the post deal change program

  • Organisations must be self-critical: If they lack the experience, skills or track record of successful deal execution, they need to get help


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