After cutting through the red tape in Paris to strike a deal with Alstom, General Electric (NYSE:GE) faces a new challenge in persuading the European Union to approve the merger. On the cusp of GE's largest acquisition ever, the last thing CEO Jeffrey Immelt wants to see is government authorities raining on its parade over antitrust concerns. That's what happened in 2001, when the EU threw down the gauntlet on GE's proposed merger with Honeywell. In this case, however, there's reason to believe history won't repeat itself.
With a market capitalization of $265 billion, GE is no small industry player. Its biggest competitor, for perspective, is Germany's Siemens, which boasts a market cap less than half its size at $111 billion. Because of their clout in the industry, both Siemens and GE often find their deals under intense scrutiny by government authorities. That doesn't mean, however, that their acquisitions always fall short in the last hour.
In fact, Immelt remarked that the company "has had 80 deals approved in Brussels" since the Belgium-based EU offices nixed the potential Honeywell tie-up more than a decade ago. Meanwhile, Siemens is on the cusp of closing a blockbuster deal of its own for Rolls-Royce Energy businesses.
Leaders at both companies are well acclimated to the regulatory environment, and often a few concessions can be made to grease the wheels of commerce if necessary. Already, GE has proved quite skillful in this respect as it reconfigured its initial offer to accommodate the desires of France's economy minister, Arnaud Montebourg. As it turns out, Montebourg was a key proponent of a tie-up between Alstom and its chief competitor in Siemens. He envisioned the creation of two "European champions" of energy and transport, but ultimately insiders and experts agreed that it was unlikely the EU would allow two companies to wield such intense market power.
Subsequently, Siemens regrouped and teamed up with Mitsubishi Heavy Industries, but eventually it lost out to GE in the bidding war for Alstom, an $11.5 billion company by market cap. Compared with Siemens, a GE-Alstom deal presents a merger full of contrasting rather than overlapping strengths. For example, Alstom possesses a strong steam turbine business and a larger footprint in the European markets. GE, on the other hand, is lacking in these areas when compared with Siemens. The pieces of the puzzle, then, fit together nicely for GE and Alstom, whereas the idea of "European champions" would have left authorities skeptical of the resulting pricing power. For a closer look at the combined strengths of GE and Alstom, the following chart shows the market share held in three key industries:
As depicted, GE holds a strong position in the gas turbine market, but the addition of Alstom only nudges its overall share higher by a mere 4%. Further, the GE-Alstom combination will sit in fourth position in the global steam turbine market and will lag ABB and Siemens in the power grid space. From this angle, it's hard to make an argument that GE will suddenly be able to run all over its competitors if the deal is allowed to go through.
More pressing matters at GE
Given Alstom's relatively small size and the fact that a GE-Alstom marriage fails to overwhelm the European market or any particular industry, investors can bet that authorities will give this merger a stamp of approval. It might not come until 2015, but Immelt and company will be pulling out all the stops between now and then to nudge it along.
The more pressing issue that GE faces then will be the response of workers as the two company cultures either blend beautifully or collide in a counterproductive fashion. Early reporting from Reuters suggests that Alstom workers in France favored GE over Siemens, concluding that the idea of working for GE represented the lesser of two evils. Fortunately, both companies have deep roots in France and have collaborated in the past to launch Alstom's first gas turbine. Shareholders like myself are hoping these two prove compatible over time.