How the Alstom Acquisition can Boost General Electric Company’s Earnings

In its efforts to expand the industrial business, GE is in an acquisition mode. Alstom looks tailor-made.

May 5, 2014 at 10:54AM

Acquisitions have been a way of life for General Electric (NYSE:GE), taking over 200 companies in the past decade alone. Through these new additions, GE has been trying to expand its core industrial segment and reduce dependence on the finance business. The latest on its radar is France's Alstom (NASDAQOTH:AOMFF), GE's closest competitor to date in the power generation sector. GE has made a $17 billion bid and Alstom's committee will review the offer by June 2.

Let's find out why GE is keen on this acquisition and how it can benefit.

Re-alignment of business lines
GE has taken brisk measures to cut its finance arm GE Capital down to size after the financial crisis of 2008-2009. This segment once constituted more than half of the company's earnings, but now GE wants to reduce it to less than 30% .

The U.S. major aims to increase its industrial segment's share to 70% by 2015, up from 55%  at present. Then again, under the industrial umbrella, GE is focusing on the power, aviation, and the oil and gas sectors. Acquiring Alstom's power generation business would bring GE closer to its goal.

While the industrial segment registered a good 12% profit growth in the first quarter ended March, the financial business posted a decline in revenue. The key top line drivers in the industrial segment were the power, oil and gas, and aviation sectors, which offset the weakness witnessed in the energy, health care, transportation, and appliances sectors. Notably, these industrial operating activities contributed almost 70% to total cash generation.

Ge
Source: Company presentation, chart prepared by author.

The Alstom allure
A Bloomberg report says that the deal might be the best one during GE chief executive officer Jeffrey Immelt's tenure. The U.S. giant is trying to reposition in the European and emerging markets where its power generation sector has not yet caught pace. Alstom fits the bill as it has a strong hold in the European market. Not only that, but it is also the right candidate for GE to save on taxes under U.S. rules. One effective way of reducing its huge $57-billion overseas cash pile sans tax liabilities is to acquire a foreign business.

GE is fighting tooth and nail to get its hands on the European industrial giant, even with a skeptical French government not too keen on letting a U.S. company take over. The deal has taken a political color as both a government-owned utility and the national railways are big clients of Alstom.

Boost to industrial business
The Alstom acquisition will add to GE's growth drivers as it specializes in making equipment for power plants, smart grids, renewable energy, and trains. Its iconic high-speed TGV trains will help boost sales of GE's lagging transportation segment in the European market.

Alstom pioneers in power plant generation, being a leading provider of gas, hydro, and wind turbines in Europe. Though GE remains a dominant player in gas turbines, it has fallen behind in coal-fueled turbines. Alstom stands second only to the German bigwig Siemens in manufacturing these coal-fueled turbines. The takeover will add to GE's product portfolio in emerging markets where cheaper coal-fueled steam turbines are preferred.

A quick look at Alstom's segment sale breakdown for fiscals 2013 and 2014 shows its perfect alignment with those of GE's.

Epg
Source: Alstom investor presentation, chart prepared by author.

According to a Wall Street Journal report, the combined energy assets of these two companies would create a dominant player in the European power-generation industry. Since 71% of Alstom's revenue in 2013 was driven by its energy business and it was the third biggest player in the power-transmission gear market, GE's buyout of the former's power generation and transmission grid assets could substantially add to the American behemoth's earnings.

Last words
GE is putting its money where its mouth is and looks poised to gain from the union. The move will help the company derive its target earnings from the industrial operations by 2015. It would give GE a definitive position in the European market and expand its presence in the emerging markets. Overall, the synergies from this association cannot be undermined and GE could benefit from all perspectives.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

ICRA Online has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers