The Global Utility: The Experience from an Acquisition Made in the United States by a Foreign Utility by Chris Trayhorn, Publisher of mThink Blue Book, November 15, 2000 Our story starts in 1991. After 40 years of government ownership, the U.K. electricity industry began to privatize in 1990. England and Wales were first, with the formation of 12 regional electricity distribution companies, a transmission company, and two new generating companies. The following year, it was Scotland’s turn. That’s when the customers and employees of a government-run electricity board became the customers and employees of a new, vertically-integrated company called ScottishPower. As recently privatized companies, we were all novices facing a new, complex competitive environment. Many utility brethren entered with gusto – and their tales of woe are well documented in U.K. utility folklore. ScottishPower’s approach was more measured. Figure 1 ScottishPower Regional Territory – 1991 Inventing the Wheel It was apparent to ScottishPower management that the company must first get its core business in order. Certain issues required urgent executive attention: No clear strategic direction existed. Commercial market savvy was lacking at all management levels. The company culture was focused internally rather than on the needs of customers. Reshaping the core business required clear leadership, focused on improving cost and customer service efficiency. That process began with improvement programs driven primarily by benchmarking and business process re-engineering (BPR). ScottishPower learned from its employees, from other utilities, and from companies in other industries that enjoyed high levels of customer interaction. ScottishPower learned from its customers that their attitudes and expectations were changing and that we needed to recognize this to be competitive. Also, underpinning the internal transformation was a complete overhaul of the human resource strategy. Executives became directly involved in developing management capabilities. Managers were groomed through the use of personal development plans, MBA, and senior executive courses. Formal succession planning was initiated. Task-specific training centers were developed as were more broadly focused open learning facilities. Best in Class The payoff became apparent as competitive benchmarking was conducted against other U.K. utilities for 1994-1995. ScottishPower was rapidly becoming best in class. Expanding Horizons External commentators, such as regulators and industry analysts, confirmed ScottishPower’s leading position. It was time to take a larger view of the world. From ScottishPower’s beginnings as a newly privatized utility, the strategic approach needed to create shareholder value was clear: maximize performance in the core business by transforming it from a bureaucratic entity to a competitive leader – and then grow by replicating that model. Adopting a measured approach, it was decided that the first opportunities to expand and diversify should be close to home in the U.K. As the company’s abilities matured, international targets would follow. ScottishPower made its first move in 1995. That’s when it became the first U.K. electricity utility to buy another with a successful takeover of Manweb. This was followed in 1996 by the acquisition of Southern Water – marking the first purchase of a U.K. water utility by a U.K. electricity company. Since being acquired, both Manweb’s and Southern Water’s operations have improved dramatically. Each has significantly reduced costs while raising performance and customer service levels. Both are now positioned among the leaders in their sectors. ScottishPower also benefited through the valuable experience it gained as a result of the acquisitions of Manweb and Southern Water. Among the lessons learned were: The need for full executive commitment The need to gain detailed knowledge of value drivers within a business The importance of a clear focus on customer service The necessity of thorough due diligence and careful valuation How to set aggressive targets during transition How to develop a comprehensive approach to implementation and its tracking The need to focus on management and people development In addition to these two acquisitions, ScottishPower also grew organically. The company built on its existing telecommunications infrastructure by adding fiber optic access lines and strategically placed switches, combined with a strategy to build traffic on the network. Small acquisitions brought in additional business. By November 1999, ScottishPower’s telecommunications business offered 49 percent of its stock in an initial public offering worth $1.6 billion – a good return on a $0.5 billion total investment. As well as being a leader in the deregulated electricity market, ScottishPower expanded into the natural gas retail market. With 700,000 gas customers by March 2000, the company was placed among the top three U.K. gas retailers. Heading West In 1998, ScottishPower initiated the next part of its strategic plan – the move to international markets. A small corporate team initially undertook a global search of countries to identify environments that would support value-creating deals and offer more than one possible acquisition target. With its apparent strategic synergies with the U.K., the U.S. emerged as the favorite. Common language, similar culture, fragmented industry, and markets on the verge of deregulation combined to make it the top choice. Once this was decided, selection criteria were established such as company size, presence of nuclear generation, and the strength of the share price stock. Scrutiny of the top-10 ranked companies followed, and PacifiCorp emerged as a leading candidate. A multi-billion-dollar electric utility, PacifiCorp offered a wide service area that stretched across six U.S. states, as well as a large, low-cost asset base, and international experience of its own with its Australian subsidiary, Powercor. ScottishPower’s acquisition of the Portland, Oregon-based company would create benefits for all stakeholders. It would also mark the first acquisition of a major U.S. electric utility by an overseas company. The proposed acquisition was announced on December 7, 1998. Figure 2 Competitive positioning among UK utilities in 1994-95. See larger image The Art of the Deal Executing an international acquisition is a complex process in any industry. But ScottishPower’s acquisition of PacifiCorp was made even more so by regulatory hurdles in six states and three countries. However, good corporate finance, regulatory, legal, and communications advice, which had been put in place at least nine months before the merger announcement, all contributed to making the merger a success. As soon as the deal was announced, the approval clock started ticking. New to doing business in the U.S., state and federal approval processes were completely alien. Due to the deal’s uniqueness, scale, and complexity, the aggressive timelines would not have been possible without the full support of PacifiCorp management. But even with PacifiCorp’s valuable assistance during this process, it was useful to have independent advice as well. The original, ambitious timeline was to complete the deal within one year – half the time most industry pundits deemed necessary. We made it. The eventual milestones achieved were the following: December 7, 1998 – Merger announced Winter/Spring 1998-99 – State and federal filings and testimony May 6, 2000 – U.K. and U.S. shareholder documentation published June 1999 – U.K. and U.S. shareholder votes Summer 1999 – State regulatory hearings November 30, 1999 – Merger approved Figure 3 ScottishPower’s strategy to expand and diversify How We Got There A ScottishPower/PacifiCorp Joint Executive Committee met monthly to oversee business operations and the regulatory approval process. It was balanced in numbers between ScottishPower and PacifiCorp. A series of teams were created to handle the day-to-day work of completing the merger. A Transaction Team dedicated to corporate finance, investor relations, and advisory services was established in the U.K. The team’s primary responsibility was ensuring the deal could be concluded satisfactorily from a financial and legal perspective. A Portland-based Regulation Team of 20 people was created to drive the robust project management needed to execute the regulatory approval process on such aggressive timelines. Fulfilling the requirements of state-level procedure proved a significant task in itself. Though previous research made team members aware of the process, only experience could really teach us just how much work was really involved. The process is handled much like a court case, except that all testimony is presented in writing. After testimony is filed, intervenors such as major customers, community groups, or state utility commission staff cross-examine by submitting written questions in a process known as “discovery.” In the merger case, more than 2,000 discovery questions were submitted – each of which needed to be answered within 10 days of when it was filed. The sheer workload required a dedicated team to manage the process. Questions ranged from simple information inquiries to requests requiring very detailed analysis. A network of experts had to be established in the U.K. and U.S. to ensure consistency and quality of responses. This team, in turn, was backed by a team of customer service, community and environmental experts charged with communicating ScottishPower’s policies and achievements to key influencers, community, and pressure groups. Figure 4 The evolution of ScottishPower Group – 1997 Communications For any acquisition to succeed, a robust communication plan is needed. This requirement only escalates when dollar amounts increase and oceans separate the parties involved. Face-to-face contact is everything in terms of winning stakeholder approval. Within the first four months, I personally met with several thousand PacifiCorp staff, local and national press, more than half a dozen U.S. congressmen, five governors, more than 100 state legislators, 48 mayors, 50 elected officials, and 12 state regulatory commissioners. Other ScottishPower and PacifiCorp team members conducted similar meetings as well. Local customers, especially in certain rural areas, required face to face comforting. Public meetings in the U.K. involving utilities are rare and sparsely attended. Yet in some U.S. communities, such meetings brought standing-room-only crowds. ScottishPower executives won respect and quelled fears at these meetings by sharing the customer service successes of our previous acquisitions. Since any issue, however small, has the potential to derail a deal in such an environment, we made a concerted effort to use people on the ground in local communities to quickly and proactively deal with issues as they arose. Knowing that several thousand PacifiCorp employees lived in these communities, regular efforts were made to keep them informed of the latest merger developments. In addition, a number of key ScottishPower and PacifiCorp employees were assigned to work in local communities to resolve their issues and answer questions about ScottishPower and the merger. In the end, we delivered. We made our one-year approval target with a week to spare. The deal was approved November 30, 1999 – on St. Andrew’s Day. Figure 5 PacifiCorp’s reach in 1998 Looking Ahead Despite the thousands upon thousands of hours that went into making the deal happen, the real work has only just begun. PacifiCorp has a workforce of 8,000 – of which only 20 are strategically placed Scots. We need to make sure all 8,000 employees are proud of PacifiCorp and ScottishPower and anxious to help us all succeed. Their response thus far has been truly encouraging. Going forward, we face the significant task of seeing that PacifiCorp delivers on our merger commitments to provide improved customer service, increased shareholder value, increased community involvement, and an increased commitment to the environment. These factors, together with our commitments to efficiency and safety, will soon make PacifiCorp a top-10 U.S. investor-owned utility. For just as ScottishPower once reinvented itself to thrive in a newly-competitive utility market, PacifiCorp will soon need to do the same. Retail electric deregulation is occurring to some degree in most states, albeit at a different pace in each jurisdiction. Federal laws about who owns and has access to utility transmission systems will soon change the rules of the game even more. PacifiCorp will learn to adapt because it must – and it will have the benefit of ScottishPower’s experience to draw upon. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.