Historically, merger and acquisition activity in the energy sector has risen when oil prices have declined — and the current “lower-for-longer” environment is no exception.
Consolidation is moving ahead at a record-setting pace, triggered by a number of factors that include high debt levels, low interest rates, financial stress, narrowing bid-ask spreads, private equity stockpiles, the need to rebuild legacy infrastructure and a strategic focus on diversification and growth.
Oil, gas and utility companies seeking to strengthen their competitive position through M&A may find it easier said than done, however. Research from McKinsey & Company has found that creating value from M&A deals when oil prices are in down cycles (and during periods of flat, low prices) can be especially challenging.
The most successful routes typically focus on reducing cost and increasing efficiency through post-merger integration and synergies.
Clear strategic direction combined with rigorous planning and execution is essential to value creation. Business transformation through M&A requires melding complementary capabilities, people and culture, along with consolidating operational infrastructure, organizational structure and procurement processes.
Technology integration also plays a pivotal role in optimizing efficiencies, especially as companies face increasing pressure to go beyond traditional cost-reducing measures such as layoffs and capital expenditure cuts.
Digital technologies have been increasingly driving efficiencies in resource exploration, recovery and production, as well as asset management and compliance. On average, oil companies can save between $500,000 and $1 million per day by minimizing high-impact, nonproductive time wasted due to technical or physical extraction difficulties. And companies can increase productivity as much as 30 percent by leveraging Big Data and predictive analytics along with more flexible production techniques.
So it’s no surprise that booming M&A activity raises expectations for achieving synergies through improved enterprise technology. However, integrating disparate supervisory control and data acquisition systems and technology platforms is no simple task when companies merge or acquire multiple firms, each with its own legacy systems. Minimizing costs and maximizing efficiency depend on the ability of the IT team to quickly and effectively centralize and standardize control platforms, communications and connectivity.
Like their oil and gas counterparts, many utilities see M&A as a promising way to adapt to evolving market conditions. Scale often matters to companies looking to move beyond the status quo, especially when it comes to leveraging data and technology.
Here are three key reasons why:
Rising customer expectations. Customers are getting savvier about energy costs and consumption. Increasingly, they’re demanding user-friendly online interfaces, near real-time usage data and the ability to integrate energy-saving strategies ranging from smart thermostats to solar panels.
Cybersecurity. Larger utilities have more resources to protect their systems — and customer data — from cyberattack, more important than ever as cyberthreats targeted at critical infrastructure continue to grow in frequency and sophistication.
Smart grid expansion. From smart meters to mobile devices to predictive analytics, utilities see the IoT and smart grid as linchpins in their efforts to improve efficiency, reliability, responsiveness, performance and cost-effectiveness.
Due to the highly secretive nature of most M&A negotiations, IT professionals often have relatively limited time to prepare for technology integration once the deal is closed — despite the fact that it’s one of the largest cost factors in overall M&A return. To support their companies’ M&A objectives most effectively, CIOs and IT teams should:
Get involved in the M&A process as early as possible. IT leaders serve as valuable strategic partners in both pre-merger assessment and post-merger integration. For example, they can help the transition team take advantage of the right data and tools to evaluate and accurately calculate potential synergies and costs.
Align IT to business needs. It’s important to assess how potential synergies — or lack thereof — affect infrastructure, control systems, and processes and applications. The many challenges include database consolidation, data integrity, system mapping and integration, asset reallocation, networks, interoperability and cybersecurity.
Create a flexible, adaptable, unified IT environment. The sooner disparate systems can be integrated and data successfully migrated, the faster the combined organization can capitalize on enterprise synergies from exploration to asset management to supply chain, and the more effectively key performance indicators can be tracked.
Read more about the energy and utilities tech market in this CDW report.