Take a Piece of Me

Why shedding parts of a merged entity can make a company whole.

In late February, the former WPS Resources Corp. announced that it had completed its $1.8 billion acquisition of Chicago-based Peoples Energy Corp. and changed the company name to Integrys Energy Group. At the same time, it decided to divest one of Peoples’s major assets, Houston-based Peoples Energy Production.

Divestitures are booming. According to Dealogic, 10 of the 40 largest deals announced this February were divestitures. Of those, 5, including The Blackstone Group’s $2.9 billion sale of real estate to Maguire Properties and Anadarko Petroleum’s sale of its $860 million stake in oil fields in Texas and Oklahoma, followed mergers. Last year’s major postmerger divestitures included Baker Hughes’s $2.4 billion sale of Western Geco and Time Warner’s sale of its German and British AOL businesses, according to Mergermarket (see “Merge and Purge” at the end of this article).

But just because divestitures are popular doesn’t mean they’re easy. At Integrys, “first we needed to understand the projected earnings for [Peoples Energy Production] and the risks associated with owning it. Then we needed to estimate the value if we were to divest,” explains CFO Joseph O’Leary. Integrys’s financial needs naturally played a role in this calculation. Peoples was the firm’s third acquisition in 18 months, including the $660 million purchase of two natural-gas utilities in Michigan and Minnesota. Those deals had required the firm to float significant short-term debt — $723 million at year-end, according to O’Leary. The sale, which is being facilitated by JPMorgan Securities, will allow the company to pay down some of this short-term debt.

Another factor is focus. Integrys is increasingly focused on energy delivery rather than production, so the sale of Peoples Energy Production, an oil and natural-gas extraction company, allows it to continue concentrating on its core business. The divestiture also lowers the company’s risk profile, because energy delivery is less volatile than energy production. This stabilizes Integrys’s credit rating, which is vital for public-utilities firms as they negotiate rates with municipalities.

A Delicate Procedure

In some respects, disposing of unwanted portions of an acquired company is as complicated as planning the acquisition in the first place, especially if the asset is deeply intertwined with the rest of the business. Still, if a company has decided to maximize its returns on a particular asset by selling it, every day it delays represents a loss at least equal to the difference between the return the asset generates as part of the firm and the expected return on the sale. Moreover, hanging on to an unwanted asset can distract management from the core business — sometimes with unforeseen results.

For instance, following its acquisition of Segue Software in February 2006, Cupertino, California-based Borland Software announced its intention to sell a division that creates software tools for program developers, in order to concentrate on automated lifecycle management. But the division languished well past the third-quarter deadline set for finalizing a sale when the company could not find an adequate buyer. Finally, in November, Borland announced that it would no longer attempt to sell the division and instead took steps to spin it off as a wholly-owned subsidiary. Software analysts believe the subsidiary will have trouble competing in an increasingly tight marketplace.

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