FirstEnergy Bargain Shops, But is it a Sweetheart Deal?

FirstEnergy, that large utility out of Ohio best know for being at the blame end of all the finger pointing during the 2003 blackout in the Northeast, has decided to throw caution to the wind (farm) and make a play for Maryland-based Allegheny Energy for nearly $5 billion----although like Ted Turner buying his first TV station, no actual money will change hands, just stock.

At first glance, it seems like a sweet deal. FirstEnergy gets a bigger footprint and Allegheny stockholders get a price above what's being currently traded for their slice of the pie. Plus, it would form one of the largest power companies in the U.S., and bigger is better, right?

Well, not always. The American public in general---and American investors specifically, it would seem, given the blah reaction of the stock market to this announcement---remember all too well the "we're too big to fail" mantra of banks before the recession. And now, bigger isn't always seen as better; it's just as often seen as a breeding ground for folly, hubris and ego.

Of course, when you're as problem-laden as FirstEnergy and Allegheny in customer reputation and reliability, it may be simply a matter of bad branding. If the power company you already don't like is bought by a power company with the reputation for blackouts and huge million-dollar government fines, it may be that two wrongs don't actually make a right.

And, there are other questions hanging in the air as well. First, how many job losses will this mean in a weakened economy? While CEOs of both companies say that they were not seeking to cut jobs, specifically, with this merger, talk of "efficiency" and "streamlining" is always translated as "layoffs" to a skittish population. That won't be stellar for their individual, or combined, reputations---just another bruise.

Additionally, what about climate change? This is a merger that seems to defy the scientists and politicians pushing for more cap and trade and less use of coal. This will make FirstEnergy a huge coal player, which is a big, big risk given that no one knows, exactly, what will come down the pike in the form of regulations and allowances. And FirstEnergy is putting all their little plastic Easter eggs of gold coin into one black and messy coal basket. Is that a good idea that will pay off or a huge risk that will bite them in the keister in just a few years?

In the end, I expect that FirstEnergy and Allegheny thought the announcement of this deal would re-establish both of them into good utility standing. But, given the economy, their past transgressions and a series of utility mergers that unraveled like cheap carpeting (Exelon and Public Service Enterprise Group, for example), it appears that most people gave this announcement the old stink eye.