Consolidation in the utilities industry should increase in the near-term as utilities companies, facing the toughest market in years, pursue strategies to improve growth, profitability and competitive position through mergers and acquisitions, according to a new study by Accenture.

The study, based on in-depth interviews with senior executives in the utilities industry and related businesses in the United States and Europe, found that surveyed executives expect M&A activity to increase over the next two years. Specifically, nearly two-thirds of the executives in the survey said their companies are likely to be involved in a merger, acquisition or divestiture in the next few years and that any merger or acquisition would likely be opportunistic in nature.

In addition, the study found that M&A activity will likely focus on selective acquisition of assets in the non-regulated sector rather than on the acquisition of entire businesses. Furthermore, nearly half of the respondents said they believe that the selective acquisition of assets will generate the greatest return for shareholders. A large majority of executives surveyed also said they believe that the industry consolidation should stabilize within five years.

"In many ways, the industry is responding as it should - refocusing on the core capability of operating asset-based businesses as profitably as possible," said James Hendrickson, a partner in Accenture's Utilities industry group. "Like any asset-intensive industry in a downturn, the next step toward restructuring should be a natural evolution - to that of consolidation," Hendrickson added.

Although the survey findings show that executives are bullish on M&A activity, the respondents acknowledged that the industry was facing several challenges that might dampen M&A activity in the short-term. These challenges include a regulatory landscape in flux; dysfunctional wholesale markets for generated electricity; present electricity over-supply, with prospects for increasing demand on the horizon; limited financial flexibility and resources; competition for access to capital; and residual negative public perceptions of the industry and the regulatory environment resulting from the Enron scandal.

When asked to identify the primary drivers for industry mergers over the next decade, the greatest number of U.S. executives chose cost and scaling of operations, followed by revenue and margin growth. Interestingly, executives in Europe said that revenue and margin growth would be the primary drivers.

The study also showed that Europeans were generally more bullish on the prospects for M&A activity than their U.S. counterparts. The global aspirations of European companies appear dampened, however. European executives surveyed said mergers were more likely with utilities companies in Western and Eastern Europe than with North American companies because of the regulatory and market uncertainties in North America.

Many of the U.S. executives surveyed said they believe there won't be any dominant company type to drive future industry consolidation. Other U.S. respondents said they believe that traditional North American utilities will be very active, seeking either mergers of equals or acquisitions of selected assets.

About the Survey
Accenture conducted in-depth interviews with senior executives at 32 utilities and related companies in the United States and Europe; 25 of the respondents were from the United States and seven were from Europe.