In early 1996, IES Industries signed a definitive merger agreement with two other neighboring utilities, Wisconsin Power and Light (WPL) and Interstate Power Company (IPC). This was the first “three-way” merger in the rapidly consolidating electrical utility industry.
The merger seemed to make good economic sense. Predictions indicated that industry deregulation would create intense price competition. All three companies had low-cost generating capacity when compared to other utilities in the Midwest. By forming a single company, the merger partners could become even more price competitive by eliminating redundancies in energy distribution, maintenance, customer service, and corporate staffs. They could then expand their combined geographical reach to lucrative metropolitan markets in the region.
Wall Street was ambivalent about the merger. The merger announcement resulted in a 10%
share price increase for IPC, but IES and WPL share prices remained flat. Part of the market’s ambivalence was due to the fact that the merger required state and federal regulatory approval.
Analysts predicted a lengthy approval process and voiced uncertainty about the eventual outcome.
In July 1996, MidAmerican Energy launched a hostile takeover of IES Industries. MidAmerican offered to pay \($35\) per share for IES stock, a \($5\) per-share premium over the closing price that prevailed before the takeover announcement. The IES board of directors rejected the buyout offer and told shareholders that the company was worth more than \($35\) per share when combined with WPL and IPC. Shares of IES common stock closed at \($33.50\) following MidAmerican Energy's hostile offer, and this price was unchanged after the IES rejection.
MidAmerican’s tender offer could not have been better timed. IES shareholders were scheduled to vote on the three-way merger agreement in mid-August. With MidAmerican’s offer on the table, IES shareholders could vote either to approve the WPL and IPC merger or to reject it in favor of MidAmerican’s cash bid. IES and MidAmerican launched intense advertising and public relations campaigns to sway IES shareholders. This contest for proxies (shareholder votes) cost the two companies in excess of \($10\) million.
Required:
1. As an employee of IES Industries and the owner of 100 shares of the company’s common stock, what questions would you like answered at the August shareholders’ meeting just prior to submitting your vote? How might the company’s financial reports help answer those questions?
2. As an institutional investor with 5% of your portfolio invested in IES shares, what questions would you like answered at the August shareholders’ meeting just prior to submitting your vote? How might the company’s financial reports help answer those questions?