Up to 90% of M&A deals are regarded as failures and 83% of M&A deals fail to boost shareholder returns. Post-transaction playbooks are a known tool, helpful in managing activity to realise value and manage risk during the transition period after a transaction. CRA has a successful record in supporting clients navigating the post-transaction process in the utility sector, including complex carve-outs and business integrations. As there is plenty of literature in the field, this paper does not aim to provide an exhaustive list of considerations but to shine a light on five that, in our experience, should not be overlooked after transactions close.
The pandemic presented the entire global economy with significant headwinds. M&A deals in the energy and infrastructure space experienced a 17% decrease in volume from the 2015 through 2019 average. As economies emerge from global lockdowns, we expect to see a rebound in the number of transactions as markets get back on track. Acquisitions can present an effective route to gain greater resilience, enhance or even pivot one’s business model as companies look to reposition themselves through cost optimisation at scale, improve portfolio efficiencies and offer opportunities in digitalisation and transformation. Essentially, transactions are driven by the belief that a new owner is better suited to create and capture value from a specific business. To deliver on this belief, a successful and thought through post-transaction approach is key.
Figure 1: Overview of closed M&A transactions from 2015 through 2020
The energy sector in particular faces multiple challenges, such as increased pressure to transition to less carbon-intensive sources, regulatory uncertainty, changing customer behaviours and demands increasing pressure on legacy retail models. Together, with opportunities presented by a technological shift towards smarter, more digitally enabled business models, the utility space seems ripe for further M&A activity. Our research shows that utility transactions have been increasing as a share of overall transaction volumes since 2015, as Figure 2 shows. Renewed focus on a green infrastructure agenda from the Biden administration, implementation of the European Green Deal as well as further commitments at COP26 this year represent a strong sustainability drive despite the COVID-19 slowdown. With the global business community reacting to challenges of meeting regional net-zero ambitions, as well as newly emerging opportunities enabled by increasing interconnection across industries, a further flurry of transactions in the coming years appears likely.
Figure 2: Proportion of closed utility M&A vs. all closed M&A from 2015 through 2020
M&A activity in the energy and infrastructure space comes in many forms: companies looking to rebalance their level of vertical integration; new entrants building market share; energy majors looking to improve business performance or acquisition of new skills to transform towards digitalisation or technology; or PE funds and active asset management companies simply looking for stable long-term returns. While the source of investment might be diverse, focus on realisation of expected target value from such acquisitions remains constant. It is therefore imperative not to underestimate the process following the transaction closing—be it carving-out assets, integrating assets into existing structures, optimising the value of the asset through transformation or a combination thereof.
The first of our five priorities focuses on the benefits of informed management of the transition process, which requires both understanding the change “hitting” the organisation, and thoroughly understanding the industry. We then touch upon how data clarity and understanding the situation at hand help deliver post-deal target value. In our third point, we highlight the importance of adaptable leadership able to steer the organisation in a new direction. Digitalisation is a key topic in the 21st century energy industry and therefore in section four we discuss how IT representation and literacy is required across leadership levels. Finally, we look at how incorporating ESG (Environmental, Social and Governance) early on in any post-transaction process should go beyond disclosures and become a genuine foundation for the overall business strategy to drive long-term value. While this could be a topic on its own, it will likely be featured during due diligence, so the period soon after close provides an excellent opportunity to ensure it is properly thought through and integrated into the business’ DNA to drive additional value.