Dial M for Merger

When will utilities see the next round of deals?

With the substantial decline in utility mergers and acquisitions (M&A) activity since the heady days of 2000, it's time to ask when M&A activity might return, if at all. Business combinations provide a potentially important means for a utility to enhance its earning and growth prospects, and one of the few alternatives available to achieve these objectives at an acceptable risk.

The elements conducive to an increased level of activity are either coming into place or, in the case of regulatory clarity, have the prospect of coming into place within the next 12 to 18 months. One reason we at Morgan Stanley expect M&A activity to increase over the next cycle is the increasing level of meaningful dialogue among senior management of companies in the industry (. 58).

In the future, transactions likely will shift in form compared with the previous cycle, with more emphasis on moderate premium acquisitions or no/low premium MOE (merger of equals)-type transactions, in contrast to the higher premium deals of the past cycle. Also, while we expect the level of M&A activity to increase, a return to the pace of 1999-2000 is unlikely.