Motives of mergers and acquisitions in the European public utilities: An empirical investigation of the wealth-anomaly

The purpose of this paper is to investigate the motivation and post-merger operating performance (OP) of European utility sectors following mergers and acquisitions (M&A).

Motives behind M&A are examined by looking into the relationships between total gains, target gains and acquirer gains. Post-merger OP is measured by comparing the sample of European utilities with a matched portfolio based on size and market to book ratio with respect to five accounting indicators: growth in turnover, growth in earnings before interest and tax, return on assets, net profit margin and growth in fixed assets.

Synergy is the primary motive for M&A in the European utility firms. This study also found that post-merger OP is negative and significant across all the five accounting indicators matched by size, and market to book ratio suggesting that utility mergers underperform in the long term. The findings suggest that gains accruing to utilities involved in acquisitions are short term in nature.

Negative post-merger OP bears important policy implications as in future antitrust/competition authorities should be more vigilant before approving utility mergers.

Public utilities possess several characteristics that are different from industrial firms and therefore need to be examined separately. Empirical literature on M&A is very limited on utilities. This study has addressed this gap by examining the motivation and post-merger OP of the European utility firms.