Alstom: A tough merger challenge for G.E
GE’s acquisition of Alstom was the biggest rumor in the energy industry this past week. Everybody praises a move that will give G.E. bigger access to European markets and stronger position in the smart grid business. But the operation will not be easy.
On May 7, we will know more about G.E’s takeover attempt on Alstom rumored by Bloomberg a few days ago. Alstom’s management promised they would tell shareholders everything about it during the annual shareholder meeting scheduled for that day.
This merger looks like a win-win for both parties. G.E would strengthen its presence in the European market and acquire some smart grid technologies it misses. Alstom would benefit from G.E.’s phenomenal financial power and global reach to develop faster. Today, Alstom’s development is hampered by a lack of financial resources. Alstom’s main shareholder is Bouygues, a conglomerate involved in communication and construction. Bouygues owns 29.5% of Alstom’s equity and the only synergy both companies have is in the nuclear business; they bid together for tenders on new nuclear facilities, which does not happen very often.
It is a long and winding road to this acquisition. Assuming Alstom’s management agrees with the takeover, G.E will have to deal with the French government. France’s new Prime Minister already stated that he will keep an eye on this operation and the new minister of Finance is well known for his relentless attempt to intervene on any event that may involve job losses or loss of control over a strategic technology or business. Unfortunately for G.E, Alstom is involved in two industries France is very proud of; the high speed train and nuclear power. The high speed train business that represents only 25% of Alstom’s €20B revenue should not be part of the agreement, and should be spun off. Transportation is a very cyclical industry and this part of Alstom will have to be partnered with another major company in order to survive on the long term. No doubt the French government will ask for guarantees regarding it. Then, both parties will have to find a solution for the nuclear business that the French government considers strategic. We think the only French company that would a good fit for acquiring this business is world nuclear leader AREVA which is 71% owned by the French government; this helps but does not guarantee that AREVA will agree. The nuclear giant is looking for a second wind and trying to diversify to renewable energy. Acquiring Alstom’s nuclear unit would go against this attempt. Furthermore, AREVA unsuccessfully acquired in the past Alstom’s T&D business that was sold to Schneider Electric only three years after the acquisition.
There is no doubt that third parties will be involved for both of these businesses, making the operation very complicated.
Assuming the takeover bid jumps over the French government hurdle, it will face another one; the E.U commission that is usually very adamant at making sure M&A’s do not contravene the basic laws of market competitiveness. G.E. could have an issue with the wind turbine business. According to a recent report by Global Data, G.E. is a significant player in wind turbine, and has strong positions in Europe. Alstom is a minor player but also with significant positions in Europe. This industry is far from mature and remains very competitive, and there is little chance the E.U will reject the merger because of it but the French government will try to make sure employment and know-how will be maintained in France.
If the merger takes place, G.E will be facing the challenge of integration. Any business school student knows that two thirds of the mergers, including the friendly ones, end up in failure with brain drain, broken processes, internal wrangling, and ultimately loss in shareholder value. Sometimes, mergers even end in de-merger as it was the case with Daimler-Chrysler. Alstom will be the biggest acquisition in G.E’s history. Both companies have very strong culture. So far G.E’s growth has been mainly organic. G.E’s employees often join the company at the beginning of their career and many of them have limited experience with the external world. Alstom’s culture is very engineering oriented and thrives in massive long term projects. The French company has little experience with the American market and actually some bad memories; the U.S is this country where Alstom tried to sell its TGV so many times, always unsuccessfully. No doubt managing the post-merger will be G.E’s major challenge.