Motives of mergers and acquisitions in the European public utilities. An empirical investigation of the wealth-anomaly

• Date: 09 July 2018
• Published date: 09 July 2018
• Pages: 599-616
• DOI: https://doi.org/10.1108/IJPSM-01-2017-0024
• Author: Sanjukta Brahma,Agyenim Boateng,Sardar Ahmad
• Subject Matter: Public policy & environmental management,Politics,Public adminstration & management

Motives of mergers and

acquisitions in the European

public utilities

An empirical investigation of the

wealth-anomaly

Sanjukta Brahma and Agyenim Boateng

Glasgow Caledonian University, Glasgow, UK, and

Sardar Ahmad

University of Liverpool Management School, Liverpool, UK

Abstract

Purpose –The purpose of this paper is to investigate the motivation and post-mergeroperating performance

(OP) of European utility sectors following mergers and acquisitions (M&A).

Design/methodology/approach –Motives behind M&A are examined by looking into the relationships

between total gains, target gains and acquirer gains. Post-merger OP is measured by comparing the sample of

European utilities with a matched portfolio based on size and market to book ratio with respect to five

accounting indicators: growth in turnover, growth in earnings before interest and tax, return on assets, net

profit margin and growth in fixed assets.

Findings –Synergy is the primary motive for M&A in the European utility firms. This study also found that

post-merger OP is negative and significant across all the five accounting indicators matched by size, and

market to book ratio suggesting that utility mergers underperform in the long term. The findings suggest that

gains accruing to utilities involved in acquisitions are short term in nature.

Practical implications –Negative post-merger OP bears important policy implications as in future

antitrust/competition authorities should be more vigilant before approving utility mergers.

Originality/value –Public utilities possess several characteristics that are different from industrial firms and

therefore need to be examined separately. Empirical literature on M&A is very limited on utilities. This study has

addressed this gap by examining the motivation and post-merger OP of the European utility firms.

Keywords Finance, Markets, Shares, Public utilities

Paper type Research paper

1. Introduction

Mergers and acquisitions (M&A) have become popular means for firm growth and

corporate restructuring (Uddin and Boateng, 2014). It is therefore not surprising that

M&A have accelerated and have become a global phenomenon (Boateng et al., 2008;

Nguyen et al., 2012). Over the last decade this trend has been increasingly observed in the

European utilities sector. For example, from 2008 to 2010 global top deals were

predominantly headed by mergers in the utility sector and in 2008 and 2009 more than 80

per cent of utility mergers in Europe were from the utilities sector (ATKearney, 2017).

One of the reasons for the surge in utilities M&A in Europe is due to fall in market

capitalisation of European utilities after 2008 due to political and regulatory pressure.

The second reason as reported by ATKearney (2017) is the availability of cheap finance

from private equity and infrastructure funds.

Despite the growing trends of M&A, research evidence indicates that M&A generally

fails to meet the anticipated goals in terms of profitability. Ravenscraft and Scherer (1987),

Tetenbaum (1999), Hudson and Barnfield (2001) and Erez-Rein et al. (2004) pointed out that

more than half of all M&A deals fail financially or destroy firm value for the acquiring firms.

The intriguing question therefore is: if M&A activities do not create value, why do

International Journal of Public

Sector Management

Vol. 31 No. 5, 2018

pp. 599-616

© Emerald PublishingLimited

0951-3558

DOI 10.1108/IJPSM-01-2017-0024

Received 16 January 2017

Revised 2 January 2018

Accepted 21 January 2018

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0951-3558.htm

599

Motives of

mergers and

acquisitions

companies continue to engage in them? The paper attempts to answer this question and

shed lights on the motives and performance of the European utility M&A.

From a comprehensive review of literature on entry mode internationalisation/M&A

and diversification, Reddy (2014) developed a synopsis of 17 theories behind these

corporate events. Yaghoubi et al. (2016a, b) undertook an extensive review of M&A

literature to examine the gaps that have still remained in this area. The two part study

reported that the sources of values in M&A are still unknown. Kinateder et al. (2017) had

examined domestic M&A in BRICS countries and reported positive and significant target

shareholder returns in the announcement period. While a number of studies have

examined the motivation and performance of M&A of publicly held industrial firms

(see Ghosh, 2001, 2004; Ravenscraft and Scherer, 1987; Zhang, 1998; Nguyen et al., 2012;

Hodgkinson and Partington, 2008; Du, Boateng and Newton, 2015), the motivation and

performance of acquisitions in utility firms have been ignored in the extant literature.

Indeed, we know relatively little about what motivates acquisitions in the utilities sector

and their performance. The lack of research in respect to the motivation and performance

of utility acquisitions is a serious omission and ought to be investigated. This is because

public utilities possess several characteristics that are different from industrial firms.

First, the regulatory environment faced by public utilities is different (Bertunek et al.,

1993). For example, the public utilities are extensively regulated by the governments in

terms of their operations including the prices they charge for their services. Second, M&A

in the utility sector are made more complicated and time consuming by the regulatory

agencies. Although further liberalisation and deregulation of the utilities market in the UK

and Continental Europe in the 1990s have reduced the government restrictions in most

European countries in terms of control through the principle of golden shares (Dnes et al.,

1998; Nestor, 2005), the regulatory agencies continue to make the takeover activities in

utility market time consuming and difficult. Finally, public utilities provide services that

are essential for economic growth and development and are generally natural monopolies.

Theabovecharacteristicssuchasregulatory pressures, pricing policies may impede

acquisition transactions and reduce the gains accruing to M&A in the utility firms. Yet, we

have seen some high profile M&A transactions in this sector over the past two decades

including Electricite de France/Graninge in 1998; National Power/Calortex in 1999; and

National Grid Group/Lattice Group in 2002. Our next question is: how do these firms

perform in the long run?

We attempt to answer the question relating to the motivation by employing the

Berkovitch and Narayanan (1993) model that utilises short-term wealth effects to identify

and separate different motives for acquisitions. To address the issue of performance, we

compare the sample of European utilities with a matched portfolio comprising of

companies in the same industry, size and market to book ratio. The results show that

synergy is the primary motive behind M&A in the European utilities sector. Regarding

the operating performance (OP), this study finds that post-merger returns are negative

and significant across all the five accounting indicators matched by industry, size and

market to book ratio suggesting that utility mergers underperform and that synergies are

not realised in the long term. This paper contributes to M&A discourse by shedding lights

on the reasons for acquisitions and the OP of the European utilities. We also show that the

synergy motive that drives utility acquisitions is realised in the short term but not in the

long term suggesting that gains accruing to utilities involved in acquisitions are short

term in nature.

The rest of the paper is structured as follows. Section 2 reviews the literature regarding

the motivation and performance of M&A. Following that Section 3 presents the data and

methodology. Section 4 discusses the empirical findings and finally Section 5 provides the

conclusions and discusses the implications of the findings.

600

IJPSM

31,5