If General Electric (NYSE:GE) fails to reach a deal to buy the energy business of French industrial outfit Alstom, it won't be for lack of trying. The American manufacturer has bent over backward recently to ease the fears of government officials and persuade Alstom's shareholders of the deal's merits.
For now, the ball is in the court of GE's chief competitor, Siemens, but recent events suggest the German conglomerate could come up short. Here's why GE looks poised to pull off its largest deal ever this summer.
GE officially started the tug-of-war on April 30, when it proposed a $17 billion all-cash transaction to Alstom's board of directors. General Electric would acquire Alstom's thermal, renewables, and grid businesses in an attempt to boost its position in the global power market. At least that's how CEO Jeff Immelt sold the deal to shareholders:
Beyond the benefits described above, GE estimates the tie-up will produce roughly $900 million in synergies by reducing costs over the next five years. Shareholders, of course, know how elusive so-called "synergies" can be, but they seem enthused about the possibility of the merger tilting the balance in GE's portfolio. By 2016, for example, the company estimates that 75% of total earnings will stem from industrial businesses, versus about 55% today. GE has roughly $57 billion in cash burning a hole in its foreign pockets, so financing shouldn't be an issue. In short, GE ensured all of its ducks were in a row before it crossed the pond to sweet talk the French, a task that has proven difficult thus far.
The French connection
After announcing the offer, GE's first objective was actually an easy one: convince Alstom's board to accept the terms of the deal. With very little fuss over the $17 billion price tag, the board did just that. But it also but left the door open for a counter bid from GE's conglomerate counterpart, Siemens. The German company was given two and a half months, to June 16, to deliver a more enticing offer. This wasn't the sequence of events GE had in mind, but it at least provided Immelt and his team some time to cut through the red tape of the French bureaucracy.
Up to this point, that bureaucracy appeared to favor a deal that would involve Siemens over GE to create two "European champions" -- one of rail and one of power. High-ranking politicians, including Economy Minister Arnaud Montebourg, were particularly vocal about their opposition to GE's suggested takeover of a prized French industrial asset.
Undeterred, Immelt seized the opportunity in May to present the transaction in a positive light to all parties involved. First, he enlisted the help of GE's CEO in France, Clara Gaymard, who could use her high-level connections to build GE's rapport on the political front. Immelt then made a rare appearance for a U.S. CEO by speaking to France's National Assembly about GE's opportunity to preserve and create jobs within the country. A day later, he delivered the same message to French President Francois Hollande. In this late-May meeting, Immelt went so far as to guarantee the creation of 1,000 jobs within France if authorities gave the go-ahead on the transaction. According to Bloomberg Businessweek, it was worth his while: Immelt seemed confident in GE's prospects following the meeting, while French authorities appeared more optimistic about the sweetened offer from the American manufacturer.
The Siemens sideshow
As GE has been picking up momentum in Paris, Siemens appears to be losing steam as the opposing bidder. Sure, it has many French officials stacked favorably on its side, but it also faces internal restructuring issues that might be distracting executives from leaning into the Alstom opportunity. As GE is doubling down on its promise to boost employment, Siemens is busy slashing roughly 12,000 jobs within its own walls. On top of that, Siemens was knee-deep in a deal to acquire energy assets from Rolls-Royce Holdings before it even caught wind of GE's European invasion by way of Alstom.
In short, Siemens finds itself in a compromising position on the eve of the June 16 deadline by which it must submit a counteroffer. Years ago, this Franco-German marriage might have made some sense, but it was shot down, ironically, when the French government opted to bail out the then-fledgling Alstom operation. At the moment, as the Financial Times skillfully pointed out, Siemens' has more pressing matters to deal with that don't involve riding in on a white horse to pry Alstom's energy operations from GE's grasp.
The outlook for GE investors
Roughly two weeks remain before Alstom is required to make a decision one way or another on GE's offer. As it stands, the cards are stacked in the U.S. company's favor. Siemens could still swoop in with an enticing counteroffer, but the German company's proposal would likely result in a more complicated swap of assets between the two entities. For the reasons laid out above, it is unlikely that Siemens has the resources to make such a deal happen at this juncture.
Meanwhile, GE has made a strong financial case to its shareholders, enticed Alstom's board, and suggested a positive economic outcome to French officials. None of these hurdles were easy to overcome, but now GE finds itself in a position of negotiating strength. Investors should stay tuned as events unfold in the near future, but from my vantage point GE seems to have this one locked up.