Finding the right target
Energy Transfer is constantly in acquisition mode, and it has a staff of four people who look for those opportunities. That staff networks within the industry and looks for leads from banks and sometimes competitors about what businesses could be on the market. Additional staff, which includes engineers and financial analysts, is often asked to look at a potential acquisition when Energy Transfer gets fairly far into the process.
Warren says the first things he wants to know about any company up for sale are summed up in three questions: “How are they operating today? How much of the capacity is being utilized today? And what are they charging for that service?”
In other words, what’s the untapped potential?
As an example, Warren cites the company’s purchase of a pipeline built to supply TXU Fuel Co.’s power plant.
“We looked at it and said, ‘Here’s a pipeline built to transport natural gas and charge maximum rates,’” he says. “‘We don’t care if it goes to a power plant or a brick manufacturer.’ We began to analyze that asset and realized there was a tremendous amount of unused potential.”
After Energy Transfer has determined that a company has potential, Warren examines the culture of the company he wants to acquire. Energy Transfer’s culture is dress-down, jeans-to-the-office casual, but the employees work hard.
“We have a definite social environment here, and we have merged several cultures,” Warren says. “I’ve had some concerns that some would not be adaptable, and we’ve been pretty lucky here. Most have adjusted to the way we do business.”
Part of what’s helped smooth those transitions is a move the company makes every time it acquires another company. Energy Transfer sends one of its top employees to help the company it bought through its early transition stages. For one recent acquisition of an interstate pipeline business, Warren sent someone who had worked with him for 30 years, even though he didn’t have interstate pipeline experience. That executive is running the acquired business from its Houston office.
“He’s completely loyal to me, and understands the way I think and what is important to me,” says Warren.
Acquisitions can be a quick route to scaling up, but Warren says executives who want to make acquisitions need to make sure they’re doing them for the right reasons.
“No. 1, be patient,” Warren says. “No. 2, exercise discipline. Don’t let your emotions take over. Don’t feel like because you lost the last three you need to be more aggressive. Remain disciplined in your approach. … We routinely come in third, fourth, fifth and sixth in contests for assets we really want, but we preach this every day to our M&A department, ‘Don’t make mistakes. These assets will, in fact, come back to us.’ We think some of them will, anyway, because we believe mistakes are being made in our sector right now.”
Davis, who served as co-CEO along with Warren until Davis’ recent retirement, says acquisitions at Energy Transfer have been carefully planned and targeted. One acquisition took 12 years to complete, and another took five years.
“Every acquisition we’ve made has been a very strategic, targeted acquisition,” Davis says. “We’ve always tried to make acquisitions when one and one would make three or four. We weren’t just making acquisitions to grow. It had to have a strategic fit into our business plan.”