Do utilities really know what they are doing, or are they just following
the trend? What do the transactions say about the company’s strategic
objectives? What does it really mean for an M&A transaction to be successful?

In this white paper, we will describe how M&A should not be used as a
strategy in itself, but as a tool that is part of a strategic framework
for positioning in the emerging industry landscape. Using the Utilities
Role Map©, we will show how the different interactions and combinations
of roles will define the future competitive environment. In this context,
we will describe the strategic rationale for using M&A as a tool to enhance
long term shareholder value. This framework for communicating the why
of the deal, combined with a methodology describing how to implement,
form our Vision-to-Value approach to M&A. Such an integrated approach
not only communicates the value of a transaction to the company’s stakeholders
but also maps out a controllable process that ensures the realization
of such value.

The Current State of Utilities M&A

The Utilities M&A Boom

The value of merger and acquisition deals in the utilities industry “exploded”
in 1999. At year’s end, $15 billion in transactions closed with another
$93 billion pending completion in the U.S. As a result, the number of
investor-owned utilities in the U.S. decreased from 114 in 1998 to around
90 at the end of 1999.

M&A deals were not confined to local markets. The number of cross-border
deals grew from 89 in 1998 to 124 in 1999 for a total value of $37.9 billion.
Europe led in terms of both being the target continent (64 percent of
total investment) and being the bidder, by value ($19.7 billion). U.S.
cross-border deals totaled $14.5 billion; Central and South America, $6.2
billion; and Asia-Pacific, $5.4 billion.

Why the booming M&A market? We believe it is the combination of (1) revolutionary
forces of change which are redefining the structure of the industry and
(2) the availability of cash which companies are being pressured to find
a good use for.

Figure 1
Value of U.S. M&A deals

The Forces of Change

This explosion of the M&A market in utilities followed the general trend
across industries where the total value of all M&A deals worldwide reached
$3.2 trillion. The forces of globalization and market liberalization,
combined with the emergence of new information technologies, are driving
the trend towards consolidation. Growth through M&A enables increased
competitiveness through reduced costs and faster entry into new and converging
product and geographic markets. Record-setting values are being set in
M&A deals in network businesses like banking, transportation, telecommunications,
and media. These industries are characterized by high fixed costs, rapid
rates of obsolescence, and converging markets and, therefore, will benefit
the most from increased scale and scope in terms of both assets and capabilities.
The utilities industry faces the same pressures. What magnifies the impact
of these forces of change, however, is the industry’s history of regulation
and monopolistic structure. For the first time, utilities are being forced
to compete for their customers.

Figure 2
Utilities Cash Generation Potential

Have Cash, Will Merge

At the same time, restructuring change mechanisms such as forced asset
divestitures, competition transition charges, and stranded cost securitization
result in sudden increases in utilities’ cash reserves. Add this to the
traditionally strong cash generation nature of the utilities business,
favorable debt ratings, and the ability to cut back dividends, and utilities
have their strongest cash positions in years. As expected, the capital
markets, which are increasingly focusing on shareholder value creation
and the efficient use of capital, are quick to demand that management
present a clear strategy on how to utilize this growing cash reserve.
And if they can’t, then investors demand that it be given back either
through stock repurchases or in the form of dividends.

It’s a dangerous combination – a revolutionizing industry forcing former
monopolists to re-think their strategies and to defend their market positions,
and cash in their pockets that allows them to “buy” and “merge” their
way into their chosen new strategies.

Figure 3
S&P 500 versus S&P Utilities since 1996

Investors Are Not Convinced – Yet

So how have investors reacted to the utilities’ display of “strategy”?
The sector’s continued under-performance relative to the general market
[Standard & Poor’s (S&P) Utilities declined 12 percent in 1999, whereas
the S&P 500 gained 20 percent] suggests that investors remain unconvinced
that utilities know what it takes to succeed, or even survive, in competitive
markets. While utility stocks have recovered somewhat in 2000 (S&P Utilities
increased approximately 30 percent from the beginning of January 2000
to the beginning of August 2000), they still significantly under-perform
the major stock indices over the past 3 to 5 years. (From the beginning
of January 1996 until the beginning of August 2000, the S&P 500 more than
tripled the performance of the S&P Utilities.)

It does not help that utilities have a history of value destruction.
From 1993 to 1997, utilities destroyed an average of 4 percent of shareholder
value. Therefore, it takes a lot more than just the announcement of a
big merger to convince investors that utilities have finally awakened
and are now thinking strategically. Utilities are being told by the market
that doing an M&A deal is not a strategy that will automatically be rewarded
with higher valuation premiums.

Figure 4
The 6 Cs for M&A Success

Making M&A Work

The negative reception toward M&A activities can be attributed to a combination
of the following:

• Strategic motivations for doing the deal are not well-defined

• Acquiring company pays too much

• Inadequate transition planning pre-closing

• Integration problems after deal closing

Findings of a survey of senior executives across different industries
around the world reveal that the two key principles underlying success
in M&A are a clear purpose and a controlled process – justifying why the
deal is being done and how benefits will be realized. These two key principles,
together with four sub-principles supporting them, form what we call the
“6 Cs” that provide guidelines to achieving a successful M&A implementation.

We believe that many utilities have failed on the two key principles
– communicating a Clear Purpose or a strategic rationale for the transaction
and mapping out a Controlled Process for capturing the benefits. A well-articulated
strategy not only communicates the company’s vision of the industry and
its position in it but also lays down a route map that describes how the
company will reach that future state. In the next two sections, we present
our framework for describing the strategic rationale for an M&A deal (Clear
Purpose) and an integrated approach for taking that strategic vision all
the way to the realization of long term shareholder value (Controlled
Process).

The Strategic Rationale

The Utilities Role Map©

The revolution taking place in the utilities industry is causing an unbundling
of the traditional value chain and the redefinition of the different roles
and relationships between market participants. Hence, we developed the
Utilities Role Map which captures our view of the industry future in terms
of what the different roles will be, what the characteristics of each
role will be, and how the roles will relate to each other. The Utilities
Role Map is a powerful framework for mapping a utility’s current core
competencies with its desired competitive positioning in the future.

We have also used the Utilities Role Map to identify five different role
combinations, or paradigms, which we think will be the shape of successful
utilities in the future. Paradigms, through their footprints on the Role
Map, define a strategy for competitive positioning in focused areas of
the industry.

The five utilities paradigms are:

1. Generation and Trading

2. Horizontally-Integrated Transmission

3. Network Distribution

4. Major Account Retail

5. Mass Market Retail

Figure 5
The Utilities Role Map
See
larger image

Paradigm-Adoption Is a Strategic Rationale for M&A

The Role Map and the paradigms provide a framework for understanding
the assets and capabilities required for success. Adopting a paradigm
can be thought of as a way of strategically unbundling existing businesses
into different roles and recombining them into an almost new business.
When seen in the light of such a strategic recombination, M&A transactions
have a much clearer meaning to external shareholders and also to the company’s
own management and staff.

Strategic vs. Tactical

The adoption of a paradigm is a clear articulation of strategic intent.
It illustrates the company’s vision of how it intends to compete in the
emerging industry. It also shows an understanding of the competencies
that a company currently has, those that are required to succeed in the
chosen paradigm, and how a particular M&A transaction will bridge the
gap between the two.

The “strategies” that companies cite as the rationale for a deal (e.g.,
economies of scale, convergence, etc.) are more tactical than strategic
in nature. They define short-term wins instead of long-term competitive
positioning. It is the equivalent of buying a widget worth $1 for $0.90
– a gain of $0.10, but it does not address why the widget is necessary
in the first place.

Focused vs. Blind Growth

Adopting a growth strategy is important for a company to enhance shareholder
value, but adopting a paradigm can make the difference between focused,
value-enhancing growth and blind, value-destroying growth. Consolidation
and economies of scale have often been cited as reasons for doing a deal.
While such benefits are real, getting bigger by itself is not enough reason
to justify a deal, especially when the dynamics of the industry are changing.
The merger of two integrated utilities to form just a bigger integrated
utility does not provide an insight on how the merged utility will compete
and address the challenges in the new industry. The paradigms help explain
the logic behind a combination by focusing on those roles and capabilities
that a transaction provides.

Shareholder Value vs. Earnings Accretion

Defining the value of a deal traditionally means determining how much
earnings per share will increase because of the transaction. Earnings
growth is still a key metric for valuing utilities. However, as utilities
move away from being just dividend-providing investments, long-term shareholder
value measures will be more relevant. Competitive positioning in the new
market environment, as measured by the ability to generate cash flows,
will be more important than the transactional value of a one-time jump
in earnings per share. The value of explaining the rationale for an M&A
deal in terms of the paradigms is that it focuses on management’s long-term
commitment to shareholder value and not on the one-time gains which investors
tend to ignore anyway.

Adopting a Paradigm Enhances Shareholder Value by …

… clarifying the investment case

Using the paradigms to define an integrated utility’s current businesses
and the strategic direction it intends to pursue in the new industry structure
gives investors an insight on how to value its stock. Utilities will no
longer be valued in terms of a “utilities” multiple; instead, investors
will compare its generation business with other generators, its network
business with other networks, etc. The more management simplifies this
task for investors by structuring its businesses along those functional
lines, the quicker it will be able to attract and develop a natural investor
base. Utilities aligned along the paradigms allow different investor groups
to put their money in those parts of the business that are consistent
with their investment goals and risk profiles. Therefore, merging with
another integrated utility just to be bigger will not necessarily increase
a company’s attractiveness to investors – even with the promise of cost
savings through economies of scale. Divestitures can be as relevant as
M&A if they reflect a certain strategic focus which investors can easily
understand and buy into.

… focusing management on the key value drivers

Success in the new utilities industry structure requires competing at
the level of the paradigms. A utility choosing to be in the generation/trading
business, for example, needs to strive for excellence relative to other
generators. This means understanding and focusing on those value drivers
that are critical for that particular paradigm. As an example, keeping
the cost of capital low by taking advantage of borrowing capacity in the
networks business can be more important in such a regulated business;
whereas going after customer volumes while minimizing customer acquisition
costs can be one of the keys to success in mass market retail. M&A transactions
must be explained in terms of the acquisition of specific assets and capabilities
in order to maximize certain value drivers. Not only does this communicate
a commitment to the end goal of enhancing shareholder value, it also sets
a guide on how such newly-acquired assets and capabilities will be used,
measured, integrated, and eventually, optimized.

… encouraging the efficient use of capital

Restructuring an integrated utility into the different paradigms provides
insight on how each business can be capitalized in an efficient and risk-based
manner. As mentioned above, a regulated business like transmission should
take advantage of its stable cash flows and favorable debt ratings to
lower its total cost of capital. The more risky businesses like generation
and retail, on the other hand, should probably take in external partners
in exchange for equity. This way, the utility spreads the risk across
a bigger base of owners. Integrated utilities usually just measure one
cost of capital for the whole enterprise. The danger there is that certain
parts of the business will end up subsidizing other, more risky, parts
of the business – something that may be acceptable in start-up mode but
will definitely be unsustainable and value-destroying in the long run.

Figure 6
Strategic versus Tactical Reasons for M&A

Ascending Toward a Paradigm

The transformation into one of the paradigms is a significant jump for
any company given the industry’s current structure. As the industry evolves
over the next several years, regulatory and market parameters will become
clearer, and the roles for the participants will be more defined. However,
as some of the more proactive companies are realizing, the potential to
create value during the transition already exists. By setting the strategic
goal of being one of the paradigms, all corporate and financial restructuring
moves, alliances and M&A transactions that the company undertakes become
part of a coherent set of implementing vehicles to achieve that goal.

The degree to which a utility adopts a paradigm directly relates to the
potential value created out of such a strategy. Enabling transactions
include functional unbundling, the formation of alliances, and the integration
of merged entities along the different functions of generation, transmission,
distribution, or retail. These transactions force a company to treat the
whole enterprise as a collection of distinct businesses, each with its
own set of value drivers, metrics, and operating characteristics. By having
such focus, integrated utilities can determine which paradigm fits best
and start growing and concentrating along that chosen paradigm. Transformational
transactions, which include spin-offs and actual separation of a business
unit, push paradigm-adoption further by allowing investors to participate
only in their targeted areas of the business. Independence from the parent
company gives more management flexibility in setting goals (avoiding the
conflicts of interests common within an integrated utility) and in partnering
with other parties which may include traditional competitors of the parent
company.

Figure 7
Paradigms have different risk and reward profiles

An Integrated Approach

A riddle: Five frogs are sitting on a log. Four decide to jump off.
How many are left?

Answer: Five

Why? Because there’s a difference between deciding and doing.

From “Five Frogs on a Log,"
Mark Feldman and Michael Spratt,
PricewaterhouseCoopers

Having a strategic vision is key to pursuing a value-creating growth
strategy through M&A. As described in the previous section, the Utilities
Role Map and the paradigms provide a framework for articulating such a
vision. However, the bigger challenge is how to take that vision through
a controlled process that will lead to the realization of value. A successful
M&A implementation does not begin and end with the deal. An integrated
end-to-end approach is crucial in ensuring that M&A becomes not just an
exercise in cash deployment, but one component of implementing a focused
growth and competitive positioning strategy. The following section provides
an overview of PricewaterhouseCooper’s Vision-to-Value approach to successful
M&A implementation.

Figure 8
Management is a key value driver

Four Phases of the Vision-to-Value Approach

Strategy

This phase confirms the purpose of the deal in the context of the corporate
or business strategy and guides the activities of other phases. It explains
why the deal was done and what the targeted value is along with an operating
vision of the new organization within a stated timeframe.

Deliverable Value

This phase ensures a continued focus on realizing the value of the transaction
throughout the various stages of the overall process. It facilitates a
go/no go decision early on in the transaction from a deeper understanding
of the key obstacles to realizing value.

Accelerated Transition

This phase provides a communication strategy ensuring clear and consistent
messages. It defines the organizational structure, addresses the people
issues to demonstrate leadership, and builds commitment through a comprehensive
change program. It also provides the right focus on creating the integrated
business as a result of a thorough understanding of the issues and risks
of the transaction.

Figure 9
Examples of shareholder Value Creation

Integration Transformation

This phase provides a consistency of approach and coordination through
rigorous program management, manages implementation teams focused on creating
the integrated business, and uses the synergy assessment framework to
track and manage delivery. From a risk management perspective, it ensures
management control issues to ensure stability from “day one.”

These four phases are further subdivided into 14 modules which describe
the different, but coordinated, activities needed to achieve the maximum
benefits from the transaction.

14 Modules in the Vision-to-Value Approach

1. Strategic rationale

2. Value assessment

3. Value driver analysis

4. Value prioritization

5. Transition team launch

6. Stakeholder-driven communication

7. Selecting and deploying leaders

8. Operating style analysis

9. Organization design/HRM

10. Value-creating incentive program

11. Program/Project management

12. Mobilization/Training

13. Urgent actions

14. Value tracking and reporting

Figure 10
Ascending the value staircase

Case Studies

Centrica: The Quintessential CHAMP

From its 1997 beginning as the de-merged gas commodity supply portion
of British Gas, Centrica has quickly become known as the quintessential
CHAMP (Channel Maximizing Retail Player) with almost 34 million customer/product
relationships. Its customer-driven strategy focuses on being the leading
supplier of products and services in and around the home, and it is committed
to developing its consumer brands and associated standards of customer
care.

Centrica has taken multiple steps in the right direction to capitalize
on its retail growth strategy. For instance, in May 1997, Centrica entered
into financial services by launching the “Goldfish” credit card as part
of a plan to bundle multiple household-related service offerings. It now
has over one million card holders and claims to be the second most recognized
credit card in the U.K.

With the residential electric market scheduled to open in April 1998,
Centrica announced a goal of signing up two million residential electric
customers (i.e.,10 percent market share) by 2000 despite not having a
legacy electric business. By September 1999, it met this goal.

At the end of 1999, a net 1.7 million domestic customers bought electricity
from British Gas. This brought the total number of contracts signed to
just over 2.6 million. After about 16 months of operating in a competitive
market, Centrica was one of the largest electricity suppliers in the country.

Some of Centrica’s other strategic growth initiatives include:

• December 1997: Launched its home insurance offering and announced
  plans to sell residential telecom offerings through Goldfish
• February 1999: Announced plans to enter the residential air-conditioning
  business
• June 1999: Entered the home plumbing business

Figure 11
Vision-to-Value Approach to Strategic M&A

Major Acquisitions: Transforming into a CHAMP

In July 1999, Centrica announced plans to acquire the U.K.’s Automobile
Association (AA) for $2.5 billion, thereby adding 9.5 million drivers
to its (corporate) customer base. Centrica’s motivation behind the acquisition
was the realization that its operations complemented AA’s ability to manage
a mobile work force and to make contact with a large number of customers.
Moreover, Centrica acquired an automotive-related insurance business as
part of the acquisition and is now the U.K.’s largest independent insurance
intermediary. Centrica intends to drive large infrastructure synergies
(call centers, billing systems, etc.).

More recently, in July 2000, Centrica agreed to buy Direct Energy Marketing,
a North American energy and supply business, from Direct Energy Income
Fund. Centrica will also buy the assets of Direct Energy’s primary marketing
agent, Natural Gas Wholesalers, which provides marketing and call center
services to Direct Energy and Energy America customers.

Centrica sees Direct Energy as a direct platform into the U.S. market.
The first reason is beacuase Direct Energy is the biggest integrated natural
gas provider to residential, small business, and other commercial customers
and has the largest deregulated customer base in North America. Secondly,
Direct Energy has a 27.5 percent interest with Sempra Energy in Energy
America LLC. Energy America has about 450,000 gas and electric customers
in Michigan, Ohio, Georgia, New Jersey, Maryland, and Pennsylvania. Since
deregulation in the eastern part of the U.S. is unfolding, Energy America
will act as a platform for acquiring millions of additional customers.
These acquisitions will help Centrica implement its international strategy,
in addition to allowing it to transfer its skills and expertise that were
obtained during the deregulation of the energy markets in the U.K.

Untapping Centrica’s Innovative Potential

Centrica’s strategy runs in parallel with the CHAMP’s paradigm. It clearly
is maximizing shareholder value and is leveraging existing customer relationships
by offering a broad range of products and services that focus on home
services, road services and financial services. As can be seen, the market
has rewarded Centrica for its growth and acquisition strategy and for
its ability to offer innovative products and services to the mass market.

Since 1997, Centrica has made acquisitions to build a portfolio that
is backed by strong brand recognition and customer relationships. In the
years to come, Centrica should remain a key retail player in its local
market and become a strong player in North America. As deregulation spawns
competition, Centrica will continue to evolve into a CHAMP. It is also
expected to continue to reach globally by making acquisitions, or forming
alliances, that will capture the untapped retail opportunities that reside
internationally.

Figure 12
Centrica has developed a broad customer base

Calpine Corporation: The Value Maximizing GREAT

Founded in 1984, Calpine Corporation is considered to be the fastest
growing and largest independent power company in the U.S. Currently, it
has about 25,700 MW of base load capacity and 4,700 MW of peaking capacity
in operation, under construction, and in announced development. Calpine
also has pending acquisitions in 27 states and in Alberta, Canada.

Calpine’s growth initiatives coincide with the definition of a GREAT
(Global Relationship Energy Trader). Calpine’s strategy is to continue
to rapidly grow by capitalizing on the significant opportunities in the
power market, primarily through its active development and its integrated
approach to acquisition. Calpine develops new plants in areas where it
can take advantage of capacity and transmission constraints, thus allowing
its plants to earn above-average returns. So far, Calpine has grown by
acquiring over 40 power generation facilities.

Calpine plans to continue to capitalize on its distinctive competencies
in the areas of design engineering, procurement, finance, construction
management, fuel and resource acquisition, operations, and power marketing.
Calpine is positioning itself to lead the way in wholesale generation
and in energy marketing and trading.

Figure 13
Centrica Outperformed the FTSE 100

Major Acquisitions: Becoming a Generator and Trader

In July 1998, Calpine completed the development of its 240-MW gas-fired
power plant in Pasadena, Texas. The Pasadena Power Plant is a prototype
for future development projects (expected to expand by 545 MW). The plant
came online three months ahead of schedule and at roughly $21 million
under budget. This was attributed to Calpine’s innovative development
strategy. This strategic approach was a fully-integrated solution that
provided project management through the entire power plant development
process, including engineering, financing, constructing, fueling, and
marketing.

Calpine is just beginning to develop the expertise to market power and
natural gas in geographically diverse power markets. On February 10, 1999,
Calpine and North Energy Management, Inc. (EMI) announced the formation
of a new power marketing joint venture, Calpine/EMI Marketing, LLC. The
new entity will sell capacity and energy in the newly deregulated New
England power market. Calpine/EMI will market electricity products from
the Calpine/EMI New England power portfolio, which is designed to compete
in the deregulated New England energy market, providing flexibility to
optimally match market and customer demand. Additionally, Calpine and
EMI have been developing natural gas-fired combined-cycle power plants
that will be marketed by Calpine/EMI. Output from these plants will feed
directly into the New England Power Pool and will service areas in the
New York Power Pool and Pennsylvania-New Jersey-Maryland markets.

In 2000, Calpine has used M&A activities to greatly accelerate its growth
efforts.

On May 7, 1999, Calpine completed two acquisitions composed of 14 geothermal
power plants totalling 694 MW located in The Geysers, California. These
acquisitions are anticipated to provide Calpine with synergies that exploit
its skills in geo-thermal power generation. Calpine will also benefit
from the demand for green power in a deregulated market. On March 19,
1999, Calpine purchased the remaining 75 percent interest in the steam
fields that supply 12 of these newly-acquired geothermal power plants.
Calpine anticipates that these acquisitions will enable it to consolidate
its operations in The Geysers into a single-ownership model. It will also
allow Calpine to integrate the power plant and steam field operations.

The further development of Calpine came in June 2000. Calpine acquired
the development rights for eight U.S. projects, representing 10,600 MW
from Panda Energy. Calpine paid $124 million for these projects, three
of which were in late stages of development. Calpine also acquired 24
GE 7 FA gas turbines and 12 steam turbines from Panda Energy.

On June 26, 2000, Calpine announced its plans to acquire SkyGen Energy
for $450 million from Michael Polsky and Wisvest Corp. It acquired up
to 13,653 MW of generation and 34 GE 7 FA gas turbines. The acquisition
included three operating facilities (780 net MW), 11 late-stage development
facilities (4,381 net MW), five projects that are under construction (1,877
net MW), and 16 project development opportunities (6,615 net MW).

On August 3, 2000, Calpine announced that it completed the acquisition
of the Oneta Energy Center from Panda Energy. This is the first project
to move forward as part of the Calpine/ Panda alliance. Oneta is a 1,000
MW natural gas-fired energy center under development in Coweta, Oklahoma.
This acquisition is aligned with Calpine’s integrated growth strategy.
As with the Pasadena Power Plant, Calpine plans to manage all aspects
of project development for the Oneta Energy Center, including engineering
and design, construction, fuel supply, operations, and power marketing.

As the North American generation market has become more constrained,
Calpine has sought to secure generation equipment and natural gas supplies
to ensure its ability to continue to grow rapidly. These include:

May 2000: Announced the purchase of 36 F-class turbines from Siemens
Westinghouse Power Corporation, to be delivered in 2003 and 2004. The
agreement includes long-term service programs and performance enhancements
on existing equipment.

January 2000: Announced it has acquired 90 billion cubic feet of natural
gas reserves from Vintage Petroleum for approximately $71.5 million. The
transaction will make Calpine the largest natural gas producer in the
Sacramento Basin.

Figure 14
Calpine Partnerships and Targeted Acquisitions

Implement Your Strategy, and Stick to It

Calpine’s focused GREAT growth and acquisition strategy has been enthusiastically
received by the financial markets. Its stock market value has increased
rapidly over the past two to three years. From the end of August 1998
to the beginning of August 2000, its stock price jumped more than 1,500
percent.

In addition, Calpine has become known as one of the most innovative and
financially creative companies in the generation business. Moving away
from traditional project finance, it has successfully developed a portfolio
financing approach enabling it to move quickly when generation opportunities
arise. To manage its risk profile, it has entered into tolling or other
off-take agreements to provide secure project cash flows and decrease
the financial effects of the volatile electricity markets in the U.S.

Investors can expect to see Calpine’s risk profile increase as it pursues
an extensive U.S. merchant power plant development strategy. According
to Standard and Poors, cash flows exposed to market-based energy prices
will likely increase from 60 percent in 2000 to about 80 percent by 2004.
If Calpine continues to maintain its average availability on existing
projects (gas-fired plants 95.7 percent and geothermal plants 98.9 percent),
and if it continues to build its construction projects on time and within
budget, it may be able to realize operating margins of 30 percent on its
gas-fired, F-generation technology.

Figure 15

Conclusion

M&A is not a strategy

M&A is a powerful tool that all utilities must consider as a means of
achieving competitive advantage in the new market environment. However,
to pursue a deal just for the sake of doing it is a formula for value-destruction.
M&A is a vehicle for delivering shareholder value, but most M&A deals
do not accomplish this goal.

The strategic rationale for M&A should be defined in terms of paradigm-adoption

Understanding the different business paradigms and the roles comprising
each is crucial to competing in the emerging industry. The pursuit of capabilities
and assets in adopting a paradigm is a strong indicator of clear and focused
strategic thinking. Additionally, successfully exiting businesses that are
no longer strategic is as important as buying smart and integrating successfully.

Implementing M&A successfully requires an integrated approach from vision
to value

Good strategic thinking is never enough. Companies need a controlled
process that will make sure that the strategic intent is implemented from
formulation all the way to benefits realization. Successful M&A requires
a high level of executive management attention throughout the process,
and integration begins when the deal is being planned and negotiated.

Strategy formulation needs to start now

Luck is when planning meets opportunity. You can only be opportunistic if
you plan ahead. We are already seeing companies adopting paradigm-based
strategies, and we expect to see more. Companies who fail to do it will
find out soon enough that the capital markets have ways of doing it for
them. Remember that companies do not have to play the hand they are holding;
well-planned acquisitions can be an effective tool for transforming a company.