On Wednesday, General Electric (NYSE: GE ) took the lead in a hotly contested race with its German counterpart Siemens (NASDAQOTH: SIEGY ) , but the competition at this point is far from over. Both companies are looking to acquire strategic assets from the European industrial giant, Alstom, which is widely considered the creme de la creme of France's energy and manufacturing industry.
A deal for Alstom's power generation and distribution businesses, according to numerous reports from Bloomberg, was first contemplated months ago by GE execs. GE's CEO, Jeff Immelt, recognized Alstom as a mechanism by which to expand his company's industrial operations and increase the size of its footprint in key emerging markets.
In theory, it was a perfect fit. GE's reputation in France has been bolstered over the years by a successful joint venture with Paris-based defense contractor, Safran SA. On top of that, Alstom's roots date back to a 1920s alliance between a French engineering company and none other than GE's close cousin, the Thomson-Houston Electric Company. This deal had all of the ingredients of a blockbuster merger, one that would amount to GE's largest ever.
But, as so often happens, a few bottlenecks emerged during the last hour of negotiations. For further insight into the drama that's been unfolding behind closed doors, read this in-depth Bloomberg article that describes the driving forces behind France's political uproar that ensued immediately after the leak of a potential merger. In short, it's a story of backroom deals, miscommunication between the French government and one of the country's largest companies, and the cultural dilemma over parting with a "crown jewel" in the manufacturing industry.
Despite the turmoil, a deal between GE and Alstom could nevertheless proceed unfettered if all goes according to "the General's" plan. Since the board of Alstom formally endorsed a $17 billion all-cash offer from GE this week, Siemens has exactly one month from today to throw a wrench into the mix by one-upping its rival's bid. For investors curious about the ins and outs of this potential megamerger, here's what we know so far:
The price tag
GE placed an offer that would require the company to fork over $17 billion in cash to snag Alstom's steam turbine, electric grid, offshore wind and hydropower businesses. Net of the roughly $3.4 billion in cash held by these energy operations, GE would be deploying a total of $13.5 billion. While this figure's no chump change, it pales in comparison to the $57 billion in cash that GE currently has sitting in overseas accounts.
What's in it for GE
France might not be known for its industrial might, but Alstom's established a reputation that ranks alongside premier French operations like Airbus on an international scale. According to Barclays Research, Alstom possesses the largest installed base of coal-fired boilers and steam turbines of any power-equipment manufacturer, and it's currently ranked in the top three worldwide in gas and hydropower. The move would thus strengthen GE in the power generation and distribution industries, which it believes will require $7.1 trillion in global investment to meet the world's needs by 2035.
Upon releasing news of the bid, Immelt remarked that this field is "core to the future of GE," and one of the company's "higher growth and [higher] margin industrial segments." For perspective, Alstom's power business generated $15 billion in sales in 2013 while employing 46,000 workers in France, U.K., and other countries. Combined with GE's power and energy businesses, the acquisition could bolster GE's top line by nearly 50% because GE's related revenues totaled $32 billion in 2013.
The possible roadblocks
The threat of government intervention due to concerns about French jobs and the country's energy outlook still looms large. As I pointed out earlier this week, insiders within French president Hollande's cabinet believe Alstom execs have been flirting with GE behind their back. If Siemens can cook up a savory alternative to the GE bid, signs point toward French bureaucrats urging the Alstom board to join forces with its neighbor in Germany. However, whether GE or Siemens ultimately get the nod from Alstom, the deal remains subject to regulatory scrutiny, which could throw cold water on the mere concept of a megamerger due to antitrust issues.
The Alstom board of directors unanimously acknowledged the merits of GE's bid, meaning they believe that some positive synergies could be created through the alliance. As part of the press release, Alstom even laid out the two companies' overlapping strengths in detail. Still, the deal has yet to gain full approval, and Alstom's board remains open to a counteroffer from Siemens, the details of which could emerge in the coming weeks.
A mere week has passed since news broke of the possible tie-up between GE and Alstom, yet investors have been taken on a non-stop roller-coaster ride through the wheeling and dealing of powerful interests in the private and public sector. This saga, as far as I can tell, is likely to continue into the near future.
Right now, there's just so much at stake for the parties involved, including everyone from powerful officials to the hundreds of thousands of employees who will be significantly affected by the outcome. For Immelt, in particular, this deal could make or break his legacy as a CEO that deftly steered GE away from the brink of collapse toward a global industrial powerhouse.
The good news for GE is that Alstom, in particular, seems highly receptive to the idea of merging forces. The only caveat is whether France, in fact, remains open for business given the current political climate in that country.
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