Merger Motives For U.S. Utility Acquirers: Evidence From Performance, Risk Metrics, And Executive Compensation

Abstract

We study post-acquisition performance of US public utilities that acquired other US exchange listed firms during [1996][1997][1998][1999][2000][2001][2002] INTRODUCTIONignificant Merger and Acquisition (M&A) activity commenced for the utility industry following the Energy Policy Act of 1992. The restructurings are in response to deregulation efforts because of technological advancements such as efficient small-scale plants, and transmission systems that facilitate distribution over wider areas, reducing entry barriers and the need for local monopolies (Becker-Blease et al., 2004). Typical reasons why mergers would benefit consumers and shareholders are similar to those provided for M&A activity in other industries, such as potential increases in efficiency, economies of scale, diversification in the sources of power generation and geographic diversification leading to correction of regional imbalances.Results from prior research into whether mergers and acquisitions benefit acquirer shareholders, or the economy as a whole, have been sufficiently contradictory that surveys of the same literature reach different interpretations (Buchholtz, 1991) 1 . For M&A activity in general, acquirer shareholders lose in 65% of the cases around the time of the announcement (Sirower and O'Byrne, 1998). Whether this is because of market inefficiency and acquirer shareholders recoup the losses over the long term is unclear due to methodological biases in long-term studies. However research (e.g. Cakici, 2004) based on recent methodological prescriptions of Barber and Lyon, (1997), Lyon et al (1999) and Mitchell and Stafford (2000) tends to support Fama's (1998) contention that the evidence against market inefficiency is weak and evidence of mispricing disappears when methodological biases are removed.Utility mergers differ from those in unregulated industries in that there is greater regulatory oversight and it takes longer to accomplish the mergers. Additionally, there are restrictions on what benefits can be retained by the company and what must be passed on to the consumers (see for example Berry, 1998; Blecker-Blease et al., 2004). 1 For example Mueller (1980), Halpern (1983, Jensesn and Ruback (1983), Lubatkin (1983), Conn (1985), and Caves (1989. See also Hubbard and Palia (1999) and Agrawal and Jaffe (2000). Our study of the post-acquisition performance of US utilities that acquired other US exchanged listed firms during 1996-2002 also suggests that acquirer shareholders do not gain any abnormal returns from the acquisition over the two years following the acquisition and that stock acquirers showed a decrease in performance. There was no unexpected gain in the underlying operating performance of the company. We also find that the CEO salary increased relative to the industry for stock mergers. This suggests that method of payment may be an important factor in discerning the motivation for an acquisition. Lack of clarity regarding effects of a complex process like an acquisition, for shareholders and perhaps the ev...