General Electric’s (NYSE:GE) Alstom (AOMFF) acquisition proposal for approximately $17 billion is facing roadblocks in the form of a counter offer from rival Siemens (SIEGY). While GE is interested in getting French company’s whole energy segment, Siemens is keen on getting the turbine business only. Though pressure is mounting for the American conglomerate, it will not give up its try over Alstom.
The first question that arises is why is GE interested in taking over Alstom. GE has been lately working hard to lessen its dependence on the finance business and expand its industrial division. And for this, Alstom is a great match that could help GE in increasing the proportion of revenue earned from the industrial segment to more than 70%. Alstom’s energy wing would complement the company’s business and give it the required thrust to widen its reach with stronger products and greater portfolio.
- Warning! GuruFocus has detected 8 Warning Signs with GE. Click here to check it out.
- GE 15-Year Financial Data
- The intrinsic value of GE
- Peter Lynch Chart of GE
On the other hand, Alstom would also benefit in several ways. With the transaction proceeds, the company can invest in and improve its transportation division. The company can also use part of the proceeds to pay off some of its debt and the reward its investors through better dividend payment.
The Rival Bid Pulls the Break
Everything was looking set for GE before the intervention of the French officials, who felt that such American buyout poses threat to national security. The French government expressed their unwillingness regarding GE’s proposal and started looking for a French buyer, or at least for a European acquirer. Here’s when Siemens, together with a couple of associates – Mitsubishi Heavy Industries and Hitachi – made a counterbid for the turbine business of Alstom and made an official offer of 9 billion euro.
Both GE and Siemens have said that the acquisition would create about 1,000 jobs in France. Moreover, the two also say that the headquarter of the business would be based out of France.
But the competitive proposal has made GE’s case weaker, also because the French officials are in favor of Siemens. With two proposals on the table, the bureaucrats demand better offerings from both the sides. While GE’s bid already appears quite lucrative and managed to woo Alstom’s management, the former had to sweeten it further to appease the officials.
Adding the sweetener
The deal price of $17 billion is quite a good offer, and increasing the same might cost GE a bit more. So here’s what GE’s done. The company has made an offer of creating three equal joint ventures with Alstom to manage the business. So other than making jobs and building the headquarter in France, GE would also ensure that the name of Alstom isn’t wiped off. The first joint venture would be for the power grid business, the second for the offshore wind segment, and the final one for the nuclear steam turbine, which is the most sensitive one for the French government. This should reduce the government’s wariness on the deal.
However, Siemens still argues that despite such improvement its deal is finer than GE’s revised proposal. Alstom, being one of the prime industrial firms in France, is highly regarded by the French government and so a takeover attempt by a non-European firm might face an unpleasant consequence of a deal blockage.
So to assuage such concern, GE has proposed to give preferred share to the government so they might exercise control whenever they think it’s necessary to intervene.
Acquisition cases as these are not very easy to decide on. It could go for a toss-up. Clearly, synergies from combination are pretty high in case of GE and Alstom if compared with Siemens and Alstom. But the French government is playing the most important role and has all the power to give a go-ahead signal to a deal or block it. It would be interesting to see what happens ahead. Who will Alstom select as its better suitor? Will Siemens make another move to annoy GE? Let’s wait and watch out how things unfold for GE.