M&A 2002: The Need for Strategic Clarity

What type of merger strategy should energy companies pursue in light of new industry uncertainties?

For the more strategically intrepid acquirer, opportunities abound in the utility and energy industry. However, they are strategic, and anyone thinking he or she can earn a quick basis point will be mistaken. The opportunities come in two varieties, but there are also investments to be avoided. These are the neighborhoods in which only the most energetic and visionary acquirers should play.

This article will first describe the nature of the mergers and acquisitions activity that might be expected within the natural gas, power and energy utility sector, and then explore the associated drivers and risk factors. This will include an analysis of the trends in price/earnings ratios (P/Es) for 79 companies that R.J. Rudden Associates, Inc. (Rudden) has grouped into five categories based on each company's current strategic position within the industry. Finally, we will identify a number of companies that we believe are good examples of the kinds of enterprises that might be active acquirers in 2002 and 2003, keeping in mind that "acquirers" can often become the "acquired."