In the game of poker, a player is "on tilt" if he allows his emotions to cloud his otherwise better judgment. That's when big bets get blown. Right now, shareholders of General Electric (NYSE:GE) are hoping management's not on tilt in a high-stakes bidding war with Germany's Siemens.
On Monday, GE's rival teamed up with Mitsubishi Heavy Industries and submitted an attractive but complicated bid for France's Alstom. In theory, their joint offer opens the door for a counterstrike from GE. But will the American manufacturer take the bait? As the industrial heavyweights go toe to toe, let's look at how this duel could ultimately shake out.
GE's backdoor bid
For starters, we already know what GE brought to the table prior to this week. According to both Bloomberg and The Economist, GE's proposal found its way to Alstom's desk after months of negotiations that took place behind closed doors. The French government was none too pleased with the way it came to fruition, but GE attempted to offer something for everyone, bureaucrats included. Here are the four key components of GE's proposal:
- GE would pay $16.9 billion ($13.5 billion net-of-cash) for Alstom's power business.
- Alstom would keep its rail business, which could potentially be bolstered by the addition of GE's cash payment.
- GE promised to add 1,000 French jobs over three years.
- GE alluded to a fruitful working relationship with France, one that resembles its successful 40-year joint venture with France's jet engine maker Safran.
The first two elements provide Alstom with some relief at a time when overcapacity in the European turbine business has put a dent in earnings. The latter two, of course, were meant to be the icing on the cake as enticement for French officials.
In the days preceding the Siemens-Mitsubishi offer, GE seemed quite satisfied with its poker hand, from my perspective. But we all know that in gambling, the house always wins, and it seems more and more evident that the French government is the house.
Siemens strikes back (sort of)
Just prior to Siemens' joint offer with Mitsubishi, I suggested that the smart angle for these two companies would be to play up their willingness to cooperate with France and thereby reduce GE's political clout. Siemens was apparently poised to do just that, but it might have stretched all parties a little thin in the process.
The offer it rolled out to Alstom on Monday went over the top on General Electric, amounting to a $19.2 billion bid for the energy assets, which is roughly $2.3 billion beyond GE's proposal. Siemens and Mitsubishi's executives subsequently started to work the room in Paris, promising France's president, Francois Hollande, that they would provide 1,000 jobs and 1,000 apprenticeships should the merger gain acceptance and approval.
Fresh off a successful bid for the assets of Rolls-Royce Holdings, Siemens knows a thing or two about raising the stakes. And the German manufacturer's CEO, Joe Kaeser, was quick to state why Siemens and Mitsubishi should prevail: "Our offer is more attractive from a financial, industrial and political perspective [...] If you want to talk about a dismantling [of Alstom], you have to look at the other offer [from GE]."
The problem with this blanket statement from Siemens is twofold, however. First off, it hardly captures the nuances of a bidding duel taking place across continents. Further complicating this particular duel is the fact that French bureaucrats -- rather than the shareholders of the respective companies -- are positioned to tip the balance in one way or another.
Secondly, Kaeser's statement glosses over the caveat that a Siemens-Mitsubishi victory would result in a highly complicated dispersal of Alstom's assets. For example, should the Siemens-driven tie-up go through, the German conglomerate would wind up with Alstom's gas turbines business, whereas Mitsubishi (and its own partner, Hitachi) would take a minority stake with Alstom in its steam, grid, and hydro divisions. Market power and decision-making authority would hardly remain intact -- or in France for that matter -- and the deal suggests that Mitsubishi could acquire a 10% stake in Alstom from its current leading shareholder, the French conglomerate Bouygues. In the background, there's reason to believe that Bouygues would be perfectly satisfied with GE swooping in as a white knight.
It's not clear, in other words, whether Siemens and Mitsubishi look like a match made in heaven for Alstom or France, so GE's left wondering whether it still indeed holds the upper hand.
Will GE bring out the big guns?
Given what we know, GE seems uninterested in bolstering a $16.9 billion bid by reaching for its wallet. Instead, management could sweeten the deal for the political crowd by guaranteeing additional job growth in France, perhaps matching Siemens and Mitsubishi's promise of 2,000 additional employees. Beyond that, there's speculation about GE selling its train-signal business to Alstom as part of the overall exchange.
Shareholders of General Electric should hope that these mere token offerings are all that CEO Jeff Immelt and company put forth in the final hour. An "all-in" move that raises its bid could prove futile. France claims that it wants further cooperation in a potential alliance, but I suspect the concentration of industrial power, domestic jobs, and energy security take precedence. If that were the case, then GE's less complicated deal would likely be favorable, since merging two company cultures poses fewer issues than four. The odds of success, then, would be higher, presenting a win-win-win scenario for the three key parties involved. For now, GE can still win by playing its cards close to the chest and leaving its pocketbook in place.