David Nish, the newly promoted finance director of ScottishPower, exudes calm and self-assurance. He has good reason to feel relaxed. ScottishPower has in just under 12 months finalised a deal some said was impossible and others argued would take at least two years to complete – the acquisition of US electricity company PacifiCorp.
Nish presided over the deal in his role as deputy finance director. His promotion came less than two weeks later; he replaces Iain Russell who has moved up the ladder to become deputy chief executive. At 39, Nish joins the growing band of thirtysomething FTSE-100 FDs.
It’s difficult to gauge whether Nish managed to maintain a calm exterior during the merger. The all-paper $4bn (£2.5bn) acquisition of the west coast utility certainly offered its fair share of hurdles. Two previous attempts by ScottishPower to acquire US utilities foundered over lack of agreement on future management structures. But the transaction represents the first successful UK venture into the US utility market; rivals PowerGen and National Grid have both been seeking to make their own inroads into the US market.
Add to this the fact that the US has regulators for each individual state (PacifiCorp itself is regulated by eight different states including Utah and Oregon, which are probably viewed as the toughest regimes from a regulatory point of view) and the fact the company was widely held to be ‘ailing’ and you might think that the City’s initial scepticism when the deal was announced last December was wise.
‘If you take the US, it has about 150 investor-owned utilities, so it’s a very fragmented market. They tend to be very small players and it’s a market where competition has not yet developed,’ he acknowledges.
‘When you’re doing a first-time move transaction, there’s an initial scepticism that comes back even though the City is generally comfortable with ScottishPower’s strategy. So we put our head in the lion’s mouth.
The response was “it will take you two years to close this deal” and we stood up and said “we’ll do this within 12 months”. In many ways we got a lot of criticism for that.’
But sign they did; the transaction was completed on 30 November, just as KPMG put out, and then withdrew, a report suggesting – whisper it – that the business world’s relentless pursuit of the cross-border deal and ever greater capitalisation through merger is driving value out of companies.
The former Price Waterhouse partner doesn’t waver for a second, however.
This deal, he explains was meticulously researched, each stage of the transaction was anticipated and worked through, all difficulties embraced as challenges and timescales set for each stage. It’s the ScottishPower way, he argues.
‘We put a lot of focus on what you could call the process of the transaction. We start very early in terms of understanding why we are going into it. So we put a lot of effort into preplanning and analysis.’
Take the discovery process: under US regulations, acquisitive companies can expect a barrage of questions from interested parties, not just the regulators but customers, employee groups, environmentalists and financial institutions. And these groups can enquire into anything from the financial soundness of ScottishPower in its domestic market to the future direction of its international strategies. The usual standard is to take 30 days over each request for information. ScottishPower decided to set its own deadlines.
‘Now we have answered 2,500 in the last ten months and we set a target of ten days for each one: we hit that every time. We put pace into the process. You put in place a good team and you work hard at it. We got through this process by sitting down and working hard. That’s the ScottishPower approach,’ he says.
And look at ScottishPower’s track record. Nish says the utility has led the field since deregulation: first to acquire another electricity company (ManWeb in 1995) and first to acquire a water company (Southern Water in 1996). The flotation of its telecoms and Internet business Scottish Telecom – now called Thus – raised £500m for the company in its October flotation. Surely enough to turn initial City scepticism into future support.
‘We very much look upon ourselves as being at the leading edge of the sector. It tends to be that when you have an opportunity to change things, you also have the opportunity to be first in the market to drive the change process as opposed to being a follower. And there also tends to be a price differential in being the first. People haven’t yet appreciated the value that’s in the opportunity,’ he says.
So what does PacifiCorp look like now? ScottishPower has put a team of 25 managers into the US business. They will be matched by 25 PacifiCorp counterparts and the whole team will be looking in these crucial first months at all business processes in order to identify waste and inefficiencies.
But this isn’t just to identify duplication, Nish insists. The trick is to create value over and above taking out costs.
If the argument seems well-rehearsed, that’s because it’s one that Nish has employed over and again in his role steering the transaction. ‘In the first week after we announced the deal I was sitting down with US investor groups – and, of course, you are talking to them about something new. They are comfortable with your business as it exists, but now you are talking about expanding your group by around 40%, running a business that’s 5,000 miles away and in a different culture. So there’s that initial challenge of convincing people and again it comes down to the confidence you can put across about the credibility of the work you have done in reaching that decision. This is not something we suddenly dreamt up because we had McKinsey in that week.’
Added to that, he’s had a fraught time restating PacifiCorp accounts into UK GAAP, aligning the US utility’s reports with ScottishPower’s own accounting procedures and marrying the two to the satisfaction of onlookers – US regulators and investors alike.
‘A lot of issues we’re dealing with in terms of accounting are first-time issues: there is no precedent. Because there are very unique aspects in terms of US regulatory accounting that had to be tackled within a UK setting,’ he says.
It’s all part of staying away from merger pitfalls and actually building – and, crucially, reporting – on a deal that creates value rather than destroys it. ScottishPower, says Nish, does not destroy value. It chooses its targets with care and capitalises on its position as ‘first-time mover’.
‘It’s about bringing entities together to create another level of value rather than just squeezing out cost savings.’ But there is no doubt that growing the company will be key to ScottishPower’s ability to compete in Europe. ‘We do believe in scale. You do need financial muscle in order to develop. Europe is dominated by players much bigger than ourselves.
‘I think it basically comes back to why you undertake a transaction and then how do you then go about implementing the transaction because if you look at a lot of the transactions that fail to create value – it’s not that they haven’t been strategically sound. Most commentators would look at them and say “yes there’s been a valid reason for undertaking it”. The key thing is how do you implement the change thereafter? One of the things I think ScottishPower is well regarded for is our ability to implement and manage.’
Was this what he expected from his move from Price Waterhouse to ScottishPower two years ago? Nish has no complaints. A Glasgow University graduate, he trained with PW and became a partner in 1993.
‘In many ways I went through the typical PW partner’s career. I’d gone overseas, I worked in Canada for a couple of years and my focus was on large multinational clients.’ Nish claims that when he joined the utility, he was unaware as to the exact nature of the company’s plans.
‘ScottishPower was seen as being an aggressive entity – another blue-chip organisation. I knew it was a company that would do something. And it does have a lot to do with size and sharing international best practice.’
The deal, what’s more, has moved him firmly out of the role of an adviser to becoming ‘the one who has to deliver’. ‘That was the biggest challenge for me. In my previous role, I knew the right answers, but I never had to deliver them. It was always going to take something quite special to get me to leave Price Waterhouse.’
ScottishPower’s shareholders got their completion and Nish has already fulfilled his personal ambition. Being at the sharp end is certainly more exciting than being one step behind the client’s shoulder.
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