Contrarian Shattuck Took Constellation To the Top
$11 Billion Merger Caps Baltimore Success Story

By Michael S. Rosenwald
Washington Post Staff Writer
Monday, January 9, 2006

Mayo A. Shattuck III is the kind of guy put on earth to run companies and make multibillion-dollar deals, like last month's $11 billion planned merger of the company he runs, Baltimore's Constellation Energy Group, with FPL Group of Florida.

Shattuck was raised near Boston, the descendant of two Mayo A. Shattucks, both of whom attended Harvard. His father was managing partner of State Street Research & Management Co., an old Boston money manager, and he also ran Harvard's endowment. Shattuck III, with his third multibillion-dollar merger under his belt, is now 51. His eldest son works at Goldman Sachs & Co. His name is Mayo A. Shattuck IV.

The lineage is one of New England privilege, but it is also a pedigree that Shattuck III has sometimes chosen to flout. He has a contrarian side, and those who know him well say it accounts for much of his success. It began when Shattuck was a teenager, and he did not do something that everyone in his family expected he would do. He did not, horror of horrors, attend Harvard.

"I was a little bit of a renegade," he said recently. "This was back in the early 1970s. I applied early decision to Williams College without telling my father, who at that time was deputy treasurer of Harvard. So that was my one renegade move as a child."

While choosing Williams over Harvard may seem to some like choosing between different patterns of silver spoons, it was a choice that Shattuck's father suffered with some heartbreak. But his father, who died a short time later, acknowledged being proud of his son for having the courage to buck family custom, and Shattuck's decision may have taught him a lesson he would never have learned by following his family through Harvard Yard: When everyone is doing the same thing, advantage might present itself the other way.

As it did when he took over as chief executive of Constellation Energy Group in Baltimore four years ago. Enron Corp., which was one of the pioneers of the deregulated energy business with its high-risk energy trading operations, was collapsing, causing energy companies to dart in the other direction. Not Shattuck. He dove right in, becoming the dominant player in the sector and quickly tripling his company's revenue.

Or before that, when he became an investment banker with Alex. Brown & Co. in the 1980s. While many of his contemporaries went to work for big players like Goldman Sachs -- which at that time avoided dealings with tech companies such as Microsoft Corp., Oracle Corp. and America Online Inc. -- Shattuck helped manage their initial public offerings.

"The contrarian view is core to him being as successful as he's been," said Christian S. Johansson, for whom Shattuck has been a mentor in his role as president of the Economic Alliance of Greater Baltimore. "Very few can do it time and time again. But the higher return you are looking for, the more contrarian you have to be. If you always play the mean, you will always hit the mean in the return."

Shattuck's running of Constellation did not hit the mean. Analysts and industry observers say his strategy to buy energy assets and sell power competitively when almost everybody else would not transformed Constellation from something of an also-ran into the country's largest provider of commercial and industrial power, with revenue of $12.5 billion in 2004. Last month, he capped the turnaround with the deal to merge the firm with FPL Group.

"It's just like being an investor," Johannson said. "If you are able to understand and manage the risk, you can realize significant returns."

When Shattuck became chief executive of Constellation the risks were ample. Though he had been on Constellation's board for seven years, he admits he did not know much about the energy business. He was coming off two decades as a highflying banker, first running Alex. Brown's West Coast investment operations. It was a job made easier by a previous decision to buck his family -- attending Stanford Business School, again over Harvard -- where he met many key players in what would become the technological revolution.

Technology "was not a business that brand-name firms had been paying attention to," said Donald B. Hebb Jr., who hired Shattuck when he was chief executive of Alex. Brown, a Baltimore firm. "Clearly most people who went into investment banking went into the big firms that were paying attention to the big companies. He was certainly off the established beaten path of most of the investment banking world."

After helping lead several high-profile public offerings -- including those of Sun Microsystems Inc. and AOL -- he worked his way up, at age 36, to become Alex. Brown's president. Later he helped orchestrate its $1.7 billion sale to Bankers Trust Co. after realizing that Alex. Brown's balance sheet was too tiny to compete with the likes of Goldman Sachs. The operation was later sold again, to Deutsche Bank AG, which put Shattuck on many long airplane flights running global investments.

But Shattuck grew tired of being tired. He had started a family with his second wife, Molly, who recently did something that chief executives' wives are not expected to do. At age 38, she became a cheerleader for the Baltimore Ravens. He resigned from Deutsche Bank the day after the terrorist attacks on Sept. 11, 2001. At the time, he was also a finalist to help run the Olympic games in Salt Lake City. "That's when the board of Constellation came to me and said, 'We didn't know you were going to work right away. Why don't you come run this?' " Shattuck said.

It was not the best time for the energy business. Even Shattuck thought it was a somewhat risky move. "Enron was about to collapse," he said. "There was tremendous anxiety on the board about our company's livelihood." The company was, in fact, a mess. Among other things, Constellation drew most of its revenue from operating Baltimore Gas & Electric, which has more than 1.1 million Maryland customers. Running a regulated utility provided little opportunity for growth.

"The focus of the company needed to become the merchant business," said Constellation board member James T. Brady. "The business skills that one would look for in a CEO were very different than they were in 1995, when you would have looked for someone with utility experience. It was much more like a Wall Street entity."

It was about finding investments that could be flipped into big paydays. One of Shattuck's first key moves, Brady said, was to buy AES NewEnergy, which was a subsidiary of AES Corp. and a supplier of power to industrial and commercial customers. Constellation quickly doubled the business, selling power to most of the Fortune 100 companies. Constellation bought Nine Mile Point, a power generator in upstate New York. More acquisitions followed.

"We figured out not only could we turn it around but we could transform it in a very short period of time," Shattuck said. "We could do that because all of our competitors were headed in the other direction. We took a very bold step of doing what was considered contrarian and we decided we would become the number one competitive energy provider in the nation."

Constellation's unregulated revenue went from $1.16 billion in 2001 to $7 billion in 2003 to $9.8 billion last year. All the while, regulated utility revenue remained around $2.5 billion a year. But Shattuck's efforts to dominate a risky market were so successful that in some ways it created more risk than investors were comfortable with. Now 75 percent of the firm's revenue came from one place.

"To a lot of investors, that's more risk than they are willing to take on," Brady said.

Enter FPL Group, in the opposite position. Most of its revenue comes from its regulated business of supplying power to Florida residents. "Here was a perfect opportunity for us," Brady said. "We can reduce the risk people see in our business by adding a utility that provides stability. It almost sounded too good to be true."

For consumers of both firm's utility businesses, it might be. The deal has raised concerns from consumer watchdogs. "The biggest asset in these deals is the unregulated division and it is very clear, piecing together what's been said about this deal, that they will be using the two regulated utilities to basically underwrite their more risky but profitable merchant business," said Tyson Slocum, director of the energy program at Public Citizen.

"What happens if their bets in the wholesale market turn sour?" Slocum said "I don't see anything that will shield customers of problems at the parent company."

That could mean higher rates for consumers. Last week, the Maryland Office of the People's Counsel, which represents utility customers, asked state officials to investigate how the merger would affect Baltimore Gas and Electric customers. Public Citizen will probably oppose the merger, Slocum said.

The other gamble is what the deal means for one of Baltimore's best-known businesses. Shattuck is sensitive to those concerns. He negotiated with FPL to have dual headquarters in Florida and Baltimore, with the office here housing the competitive energy business. The company will keep the Constellation name. Constellation's philanthropy commitments are intact for 10 years.

"I think people have read the details and are taking a wait-and-see approach," Johannson said. "It's too early to tell what the impact is five, 10, 15 years down the line."

Shattuck will stay on as chairman, running the deregulated side of the business. But he has also said that once the merger closes, he won't be in control. Before the deal was announced, he reached a new severance agreement with Constellation, under which he would get as much as $15 million should he be forced out within a year, or if his duties are reduced.

"What does this deal mean for him personally?" Johannson said. "In terms of options, it looks like the sky's the limit."