Acquisitions: opportunity or victim?

• Author: Hedberg, David

A rural electric system's future success will depend on its ability to be competitive with all forms of competition. As part of its strategic planning process, the system needs to look at the prospect of acquiring another business entity-electric or other-on a friendly basis, to remain competitive. Our authors identify the potential benefits of an acquisition, potential costs of an acquisition, and offer a case study from which to learn. This article stems from a presentation which Mr. Hedberg and Mr. Lyzinski made to NRECA's Advanced Management Program, Mergers and Acquisitions: Who's Going to Own Your System, in September 1993.

In the last 25 years the electric utility industry has changed tremendously. The industry has gone from a declining cost industry to an increasing cost industry; it has started to move from a tightly regulated industry to one in which market prices are playing an ever-increasing role. This trend seems likely to continue just as it has in the natural gas and telephone industries. New competition in the form of self-generation has emerged, and the intensity of competition from natural gas, propane, diesel and other electric utilities has dramatically increased.

The 3,200+ electric utilities, varying widely in size and organization, are seeing its business environment change. If what has happened to the telephone industry, where it has gone from over 6,000 total number of operating companies in 1945 to about 1,300 in 1990, is any indication of what may happen to the electric industry, then management must obviously change to succeed, and in some cases even to survive in this new environment.

The future success of the rural electric cooperative will depend on its ability to be competitive with all forms of competition. A cooperative must explore all its options to effectively meet the needs of its current and future customers and owners. The cooperative must develop a strategic plan that may include the following:

* Continually review costs and efficiency for the distribution system and G&T in an effort to keep rates competitive, while maintaining quality service to the members.

* Enhance the value of the cooperative to its members by offering new services, i.e., water, propane, gas, DBS, etc., when these services are desired and can be provided in a cost-effective manner.

* Maximize the efficiency of the service territory, i.e., if the service territory is not configured in a logical manner, sell off or trade some of the service territory; if service area surrounds a municipal system or investor-owned utility (IOU), explore ways to improve working relationships with the utility by sharing services, supplies, etc., or pursue a friendly acquisition of the system or portions of the system.

While there may be several other areas...