Value creation in bundling utility mergers: A corporate focus anomaly

Abstract

Recent empirical studies have documented the significantly positive monotonic relationship between changes in corporate focus and firm value. Focus-decreasing activities such as diversifying mergers have been shown to diminish firm value while focus-increasing activities, including divestitures of unrelated assets, exhibit a value-enhancing effect. However, many of these studies follow the convention of excluding utilities as their regulated industry makes then incomparable to unregulated industries. Examining only utility mergers and acquisitions, this study finds that only those which occur between utilities operating in different primary lines of business (“bundling” mergers) experience significant increases in firm value. Consistent with other studies, conglomerate mergers lead to a substantial decrease in firm value. Horizontal and vertical mergers lead to insignificant wealth gains. These results present an anomaly to the corporate focus theory and indicate that the regulation of utilities creates value for related diversification - contrary to the monotonic relationship exhibited in unregulated industries.