20060101 capgemini utility ma pov

8/7/2019 20060101 Capgemini Utility MA POV

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Most of these crashes could have beenavoided if executives had used an onramp onto the M&A highway insteadof driving recklessly. For many utilityexecutives, Business ProcessOutsourcing (BPO) can be the on-rampto successful M&As, paving the way toreduced risk, locked-in ROIC, investorconfidence and long-term share-holder value.

Despite the number of failures, M&Aactivity, both in terms of deal numbersand value, is increasing. Even thoughthe utility industry is performing

well in the market, executivesrecognize the necessity to continueto increase shareholder and customervalue through cost reduction andrevenue growth.

Transformational M&A in todaysfavorable utility investmentenvironment can provide theopportunity for forward-looking leadersto achieve both faster growing revenuesand streamlined operations.

But these business benefits cannot beachieved without the commitment of theC-suiteto transform the quality andreliability of business processes.

Most people would never considermerging onto a crowded highwaywithout an on-ramp, but many CEOsare doing precisely that when theyenter the Merger and Acquisition(M&A) process.

Studies show that 50 to 80 percent ofall M&As fail to deliver the valuepromised because executives are notlooking at the oncoming traffic of anewly merged company. This results indecreased or flat profitability for thenew company most evident whenyear-end cash balances fall short of

anticipated synergy savings.

M&As fail for a variety of reasons,including:

Cultural incompatibility, changemanagement issues, organizationalconfusion and division

Overestimated synergies andinsufficient focus on growth andrevenues

Inadequate emphasis on speed,leading to loss of integrationmomentum

Flight of talent and knowledge capitalor inability to transfer skills acrossorganizations

Consolidation in theUtility Industry

Successful Mergers and Acquisitions require C-level

commitment to realize savings, reduce risk and

capture the cash

Outsourcing Services the way we see it


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500

400

300

200

100

250

V

alue($bn)

Num

berofDeals

Number ofDomestic Deals

Value ($bn)

200

150

100

50

00

2002 2003 2004 2005

This means that executives must notonly develop a plan for cost savingsand allow operating management to

focus on core operations, but they mustalso commit to an approach that will

enable them to take full advantage oftodays M&A marketplace. Large scale

BPO is that approach.

For the utility industry, the business

environment and timing are optimal forM&As. In the following pages, well

examine the current M&A climate andhow executives can best succeed in it.

EEnneerrggyyRReeffoorrmmFFaavvoorrssCCoonnssoolliiddaattiioonnThe 2005 repeal of the Public UtilitiesHolding Company Act (PUHCA) has

dramatically improved the investmentlandscape in the utility industry. By

eliminating long-standing laws andregulations that have limited growth

opportunities, provisions of the EnergyPolicy Act of 2005 are encouragingvisionary leaders to look for growth

through consolidation. Such growth

will be necessary to create new energysources, a more reliable grid, and bettercustomer service. Given this more

attractive investment environment,fewer organizations have the

opportunity to improve theirinfrastructures, thus improving

reliability essential to preventbrown-outs or blackouts.

CCoonnssoolliiddaattiioonniisshheerreettoossttaayyffoorryyeeaarrssttooccoommeeIn the U.S. today, there are more than3,000 electric distribution companies,

more than 500 transmissioncompanies, and hundreds of electricity

generating companies. The simple factis there are too many regional,undercapitalized companies that lack

the resources to lead the charge inconsolidation. The utility landscape of

the future will support only a smallernumber of larger, stronger, better

capitalized companies. Companies thatare unable to grow will becomememories.

Source of Data: PricewaterhouseCoopers


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Many mergers, however, result indisappointing financial returns anddisgruntled shareholders, employeesand customers. To benefit fromperceived economies of scale and costsavings, these companies must addresstwo fundamental challenges. First, theymust resolve the complexities ofcombining the operations and

maintenance functions and the backoffice support services of two or morecompanies into one integrated andsmoothly running operation. Andsecond, they must devise a workableplan for combining disparate corporatecultures into a new culture appropriatefor the consolidated entity.

Investment Opportunities

While consolidation in the utility sectoris not new, the market has so far only

dipped its toe into the full potential ofinvestment opportunity.

In the U.S. alone, utility companiescomprise more than four percent ofGDP, representing more than $300billion in annual revenues. Accordingto the Edison Electric Institute (EEI),the sector has achieved exceptionalfinancial performance in recent years,outpacing the overall market withsubstantial increases in market price,cash flow, and shareholder return, and

a dramatic decrease in short-term debtplacing utilities among the best-performing stocks in the S&P 500. Theindustry acknowledges that asexecutives and shareholders look togrowth, utilities have become attractiveinvestment opportunities, spawning aresurgence in M&A and an increase inaverage deal sizes, in the U.S.and globally.

Consolidation Requires a

Commitment to Execution

By eliminating geographic andoperational restrictions, the repeal ofPUHCA further stimulates industryconsolidation by opening investmentopportunities to new players. Forexample, a public utility holdingcompanys service area does not need toconsist of a single integrated system.Companies with connecting networkscan now become merger partners.Utility companies are freer to improveor deepen their commitment to core

operations. They can now developnationwide integrated strategies, shedvertical services and acquireadditional resources to become larger,flatter organizations focused onincreasing scale and revenues related togeneration capacity or transmissionfacilities.

Consolidation in the Utility Industry 3

UTIL

DJIA

Indexed Market Price Change as of January 2004; % Total Shareholder Return 2004 Index; %

6 5.3

24

34

58.1

41.8

60

IOU Short-term Debt; $ BillionsNet Cash Flow; $ Billions

UTIL

S&P 500

466%466%

2004

2000

2004

2000

39%39%

80%80%

353%353%

12

Utilities are High-Performing Stocks

Source of Data: EEI


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must be committed to a plan that willultimately transform the new companyin ways that deliver long-term business

benefits and shareholder value. Toaccomplish this, executives areincreasingly looking to third parties forguidance. And for many utilityexecutives, these third parties areoutsourcers with deep industryexperience and expertise in helpingutility companies achieve the fullbusiness value they anticipated fromtheir M&As.

BPO The On-Ramp to

Successful M&As

Companies that providetransformational outsourcing solutionscreate an attractive consolidationalternative for decision makers, byproviding an experienced team ofindustry, maintenance and technologyexperts who can deliver:

Speed to market

Flexibility in investing and divestingservices and operations

Immediate cost savings by

streamlining business processes andlocking in value contractually

Reduced or shared risk

Companies engaged in large-scale BPOhave an advantage since they arefinancially healthier, have deepexperience with their clients corebusinesses and can offer a flexiblebusiness model with the scale neededto move quickly in an M&A climate.

Is BPO right for all utility companies?More often than not, the answer is yes.In fact, by examining the followingBPO models, the advantages of M&Abecome clear.

Capturing the Cash and Lowering

the Risk

During the last few decades, the

tantalizing lure of synergies createdby integration and consolidation especially the cost savings anticipatedfrom staff reductions seemed tojustify one company paying a highprice to acquire another. Unfortunately,research and experience reveals thatexpected synergies rarely materialize orare not sustainable. Oftentimes, in themonths following a merger oracquisition, costs to deliver essentialservices often creep back up, and thevalue of the expected synergies

rarely lasts.

In spite of strong leadership, extensiveplanning, aggressive changemanagement, exhaustive due diligenceand sufficient resources, more oftenthan not, mergers continue to fail todeliver value. Clearly, a new approachis needed.

Because synergies are often neitherattainable nor sustainable, leadersdriving M&A activity need to look formore compelling ways to identify andachieve economies of scale and costsavings. Simply assigning expectedsavings targets to incumbentoperating management teams with theexpectation that they will deliver coreoperating objectives and cost savingshas too often failed to deliver results. Inaddition, simply promisingsynergysavings to investors and Wall Street isnot good enough anymore. Theinvestment community today needs to

be convinced of the value and riskmitigation in the transaction.

Simply put, continuing to executeM&A transactions the same old waywont cut it in todays businessenvironment. Instead, management

4


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Model I represents the traditionalapproach to M&A transactions thatfrequently includes the use of

consulting and process reengineeringservices. These services include projectmanagement, due diligence support,organizational redesign, processreengineering, change management,communications, performance metricsand tracking, regulatory support,technology consulting, governance andother services. Even when executed bya disciplined, dedicated team, thisapproach has a low success rate.

In Model II, the merged company

maintains operations and maintenancefunctions in-house, but chooses a thirdparty to handle corporate, back-officeservices recognizing the opportunityto reduce risk and lock in savings byusing an experienced provider of suchservices. Outsourcing firms usuallyoffer a menu of BPO services and assistcompanies to determine which optionsare likely to create the most value andaccelerate growth.


Model I: Consulting and Process Reengineering

Model II: Outsourced Corporate Services

Source: Capgemini 2006



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Model III depicts a scenario in whichthe new companys owners want toown an asset, but do not want to run

support services or operations andmaintenance functions. Asset ownersare able to focus on strategies, budget,regulatory issues and most importantly,shareholder value.

This approach will likely necessitate acollection of service providers, workingas an alliance, since the requiredexpertise can rarely be found withinone firm. Already demonstratingtremendous success in the hospitality,commercial real estate investment

and financial services industries, this isthe model of the future for theutility sector.

But many CEOs do not stop here.Assertive and innovative leaders maychoose to adopt a variation of ModelIII. Oftentimes, acquirers do not wantthe back-office assets or systems of theacquired company. Instead, buyersmay want to use their companys ownsystems or the proven systems of athird-party BPO services provider leveraging their scale or the scale of athird party and paying less because thetransaction excludes IT assets. At thesame time, both companies will benefitby maximizing their tax strategies andminimizing any negative impact to theirrespective balance sheets.

Due to industry consolidation, it is verypossible that within 10 years there willbe only a handful of utilities that areserved by a handful of asset managers

and service providers.

As these models suggest, the scope ofservices varies widely and dependsupon the players. Experienced andcompetent service providers helpcompanies understand options,articulate pros and cons, focus oncreating value, lock in ROIC andmitigate risk.

6

Model III: Outsourced Operations and Maintenance (O&M) and Services

The Future of Consolidation. The figure below shows the future of consolidation, where

asset owners leverage other organizations for their core competencies.



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retention programs to keep keyplayers, guaranteed employment for areasonable period, and severance

packages are all importantconsiderations.

During the ttrraannssffoorrmmaattiioonnpphhaassee,business processes are redesigned totake advantage of innovativeapproaches. Providers will reengineerbusiness processes to take advantage ofoffshore resources and capabilities,working out the specifics of staffing,information integration, training,handoffs, and other issues.

The rruunnpphhaassee is based on theunderstanding that, while all of theseissues are being addressed, services stillneed to be provided. BPO hinges onservice level agreements that deliverindustry-leading practices at costslower than companies can achieve byintegrating their own internalresources.

BPO delivers sustained business

value

BPO can help utilities achieve cost

savings and economies of scale, whilesubstantially reducing their risk.Instead of counting on synergies simplyas a result of combining businessfunctions, outsourcers take ownershipof the functions, calculate savings at thebeginning of the engagement andguarantee these savings, subject to theterms of defined quality and servicelevels.

Beyond the logistical and regulatoryhurdles, the merging of disparate

corporate cultures poses one of thebiggest obstacles to M&A profitability.Tailored BPO solutions help guide autility company through the manychallenges and can help companiessuccessfully navigate through the stagesof M&As to bring sustained businessbenefits and shareholder value.

During the ttrraannssiittiioonnppeerriioodd, employeesengaged in providing services orfulfilling operations and maintenancefunctions that are destined for serviceproviders must swiftly becomeemployees of the provider, receive newassignments, or receive help in seekingemployment elsewhere. Complex issuessuch as transferring employees, tenure,and other HR issues must be wellorchestrated and handled fairly to keepemployees engaged. Extensiveplanning, industry-specific consultingservices, change management services,HR solutions, and employeecommunications are an essential part of

transition. Working with employees ina fair, equitable and open way is critical



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Moving Forward

Energy reform has helped clear

construction on what promises to be abusy highway of M&A activity in theutility industry. In fact, circumstanceshave never been more favorable forconsolidation. As the traffic builds,some utilities using the uncontrolledapproaches of the past, will inevitablycrash. Meanwhile, other companies,taking advantage of the on-rampapproach of BPO, will merge smoothlyand successfully, achieving lastingbusiness benefits and sustainedshareholder value along the way.

Why Capgemini

IInndduussttrryyEExxppeerrttiissee.. With more than10,000 consultants dedicated to energy,utility and chemical projects acrossEurope, North America and AsiaPacific, Capgemini brings industry-

Copyright 2006 Capgemini. All rights reserved.

www.us.capgemini.com/energy

Capgemini, one of theworlds foremost providers of

Consulting, Technology, and Outsourcingservices, has a unique way of workingwith its clients called the CollaborativeBusiness Experience.

Backed by more than three decades of

industry and service experience, theCollaborative Business Experience isdesigned to help our clients achieve better,faster, more sustainable results throughseamless access to our network of world-leading technology partners and

collaboration-focused methods and tools.Through commitment to mutual successand the achievement of tangible value, wehelp businesses implement growthstrategies, leverage technology, and thrivethrough the power of collaboration.

Capgemini employs approximately 61,000people worldwide, with reported 2005

global revenues of $8.7 billion USD.

More information about our services,offices and research is available atwww.us.capgemini.com/energy.

About Capgemini and the

Collaborative Business Experience

specific experience to help address thecomplex business issues that

executives face.

GGlloobbaallOOuuttssoouurrcciinnggLLeeaaddeerr..Capgeminiis the global leader in developingcloser, more effective, trust-basedoutsourcing relationships that deliverbetter, faster and more sustainableresults. No other service providermatches the range and flexibility ofCapgeminis intelligent mix of solutionportfolio, commercial model or deliverylocation options. Capgeminisinnovative Rightshore approach

means having the right resources, inthe right location, and at the right cost.As our clients needs change, weprovide flexible and scalable solutionsthrough over 100 integrated deliverycenters globally.

TTrruusstteeddPPaarrttnneerr..Capgemini is theresults-driven business partner trusted

by leading companies. For TXU,transformational business processoutsourcing with Capgemini has led tomore responsive customer service, asubstantially reduced debt load, a muchmore efficient cost structure, andsignificant gains in shareholder value.Through distributed delivery, newtechnology, and more consistent end-to-end processes, Capgemini is helpingTXU and other utility companies totransform their businesses.

Amin Bishara

Vice President

Utilities Outsourcing Practice

North America

[email protected]

Eric Schmitt

Senior Manager

Utilities Outsourcing Practice

North America

[email protected]

20060101 capgemini utility ma pov

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