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E.ON Migrating to Greener Pastures

In some respect, portfolio migration has been the raison d’être of E.ON. The company is the product of a June 2000 merger between two German utility companies, Veba and Viag. Although their origins were in the utilities business, by the 1990s both companies had evolved into unwieldy multibusiness conglomerates with diverse portfolios that included businesses in real estate, chemicals, and telecom- munications.

The creation of E.ON was only the first step in a long-term strategy to refashion the combined company into a lead- ing player in European power and gas. Company manage- ment recognized that deregulation in the utility markets and growing economic integration in the European Union represented a strategic opportunity: to use the company’s strong position in Germany as a platform for regional ex- pansion. But the plan would require E.ON first to focus on its core strengths in power and gas and, second, to migrate into the higher-margin unregulated areas of the industry.

Starting in 2000, the new company commenced a series of acquisitions and divestitures that currently total over €100 billion. For example, the company’s 2002 purchase of British-owned Powergen made E.ON Britain’s second- largest electricity and gas provider. Its 2003 acquisition of

A company that embarks on the portfolio-migrator path- way to sustainability needs to carefully plan and orches- trate each step of the migration in advance. To be sure, there is always room for some strategic opportunism—for instance, BCG research has shown that downturns are the best time to make value-creating acquisitions.14 But it is important to know in advance where you are going and each step in the path to getting there.

A comprehensive migration plan is essential because an aspiring portfolio migrator has to migrate not only its businesses but also its investor base. Even if a company’s portfolio-migration strategy makes perfect business sense, the company can suffer in the capital markets if it fails to communicate clearly the logic of the various moves it is making or if investors lack confidence that the manage- ment team can make the transition effectively.

One apparel company we have worked with, for example, wanted to improve its growth prospects by acquiring some smaller but higher-margin businesses to comple-


Ruhrgas made it the continent’s biggest importer of natu- ral gas (as well as giving it a 6.5 percent stake in Gazprom, making it the principal foreign shareholder of the large Russian gas company).

Nearly a decade aer its creation, E.ON is the world’s largest privately owned energy service provider. In 2000, the company had a presence only in Germany and Swe- den. Today, it has the broadest market footprint in Eu- rope, competing in 26 countries, including the United Kingdom, France, Spain, Italy, Hungary, and Russia. It also has a subsidiary in the United States. And it has created a global business in renewable energy that includes wind and solar power.

In the past five years, E.ON’s migration strategy has led to sales growth of 15 percent per year—nearly twice the global utilities-industry sample average of 8 percent— and an average annual TSR of 14.7 percent, compared with 11 percent for its peers. With its new global footprint largely in place, however, the company may be on the verge of shiing its value-creation strategy yet again. Re- cently, E.ON announced an additional €30 billion in investments by 2012—this time focused exclusively on organic investment.

ment its large legacy businesses that were still profitable but had few prospects for additional growth. The compa- ny had begun to execute its strategy and made a few small acquisitions—only to see its valuation multiple suf- fer as the company’s traditional value investors fled the stock because they didn’t like the higher risk associated with the new growth businesses. The company began to gain traction in the capital markets only when it devel- oped and executed a carefully sequenced three-phase strategic plan to progressively shiits strategy and its in- vestor base over a two-year period. (See Exhibit 3.)

The plan carefully orchestrated an internal timetable for key financial moves, including both acquisitions and di- vestitures, with a sequence of investor communications to shape the context for how investors perceived these moves. In the first phase, the company reasserted its at- tractiveness to its traditional value investors by reducing

14. See The Return of the Strategist: Creating Value with M&A in Down- turns, BCG report, May 2008.

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