Contents lists available at ScienceDirect Energy Policy journal homepage: www.elsevier.com/locate/enpol Do acquisitions by electric utility companies create value? Evidence from deregulated markets Jo Kishimoto a , Mika Goto b, ⁎ , Kotaro Inoue c a Department of Industrial Engineering and Management, Graduate School of Decision Science and Technology, Tokyo Institute of Technology, Japan b Technology and Innovation Management / Department of Innovation Science, School of Environment and Society, Tokyo Institute of Technology, 2-12-1, Ookayama, Meguro-ku, Tokyo 152-8552, Japan c Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology, Japan ARTICLE INFO JEL classification code: G34, L21, L94 Keywords: Mergers and acquisitions Electric utility Deregulation Shareholder value Firm performance ABSTRACT In the early 1990s, the United Kingdom (the UK) initiated widespread reforms in the electricity industry through a series of market liberalization policies. Several other countries have subsequently followed the lead and restructured their electricity industry. A major outcome of the deregulation effort is the spate of takeovers, both domestic and global, by electric utility companies. With the entry of new players and increasing competition, the business environment of the electricity industry has changed dramatically. This study analyzes the economic impact of mergers and acquisitions (M & As) in the electric utility industry after deregulation. We have examined acquisitions that took place between 1998 and 2013 in the United States, Canada, the UK, Germany, and France. Although previous studies showed no evidence of a positive effect on acquiring firms through M & As, we find that acquisitions by electric utility companies increased the acquiring firms’ share value and improved their operating performance, primarily through efficiency gains after the deregulation. These results are consistent with the empirical evidence and implications presented by Andrade et al. (2001) that M & A created value for the shareholders of the acquiring and target combined firms. 1. Introduction After the United Kingdom (UK) initiated its reforms program in the electricity industry in the early 1990s by unbundling and privatizing electric utilities, several other countries followed the lead and deregu- lated their respective electricity industries. For example, with the Energy Policy Act (EPACT) of 1992, the United States (US) provided a framework for reforming its electric power industry. In the absence of deregulation, an electric utility company creates a local monopoly in exchange for compliance with various government regulations, parti- cularly with regard to electricity rates. The principal reason for government intervention is the situation of natural monopoly, more commonly known as economies of scale of the industry. In an industry characterized by natural monopoly, a company operates more cost- efficiently in a tightly regulated monopoly structure than it would in a free market composed of multiple competitors. However, since Christensen and Greene (1976) first demonstrated the possibility of loss of scale economies in the US electric power generation industry, academics and policy makers have gradually come to realize that electric power generation is no longer a natural monopoly due to the development of cost-effective technologies (e.g., the development of small-scale efficient turbines). The overriding reform goal has made policy makers to shift their focus to efficiency and cost control in the electricity industry. As a result, deregulation has changed the business environment of the industry and is facilitating the entry of many small- scale electric power companies such as renewable players into the industry. Liberalization has led to an unprecedented wave of merger and acquisition (M & A) activity in the global electric utility industry, resulting in restructuring of both the domestic and global markets. Fig. 1 shows the trend in the number of completed M & A transactions in North America (the US and Canada) and Europe (the UK, France, and Germany) during the period 1998–2013. Further, M & A activity peaked in North America during the late 1990s. However, the complex- ity of the California electricity crisis worked on the mindsets of regulators and electric utility companies and transactions slumped in 2002. Policy makers and companies recognized the risks associated with market liberalization. In addition, M & A activity experienced a http://dx.doi.org/10.1016/j.enpol.2017.02.032 Received 27 March 2016; Received in revised form 31 January 2017; Accepted 17 February 2017 ⁎ Corresponding author. E-mail address: goto.m.af@m.titech.ac.jp (M. Goto). Abbreviations: BHAR, buy-and-hold abnormal return; CAR, cumulative abnormal return; CEGB, Central Electricity Generation Board; EPACT, Energy Policy Act; FERC, Federal Energy Regulatory Commission; M & A, mergers and acquisitions; SCAR, standardized cumulative abnormal return Energy Policy 105 (2017) 212–224 0301-4215/ © 2017 Elsevier Ltd. All rights reserved. MARK