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General Electric Has a Lot to Gain from Alstom

July 06, 2014 | About:
Quick Pen

Quick Pen

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General Electric’s (GE) endeavor to get Alstom (AOMFF) under its wing faced several bumps, but the American conglomerate finally won the $17 billion deal. The deal would help GE to strengthen its industrial segment further. Not just this, with Alstom’s assistance the company would have stronger foothold in the European market. The transaction is estimated to complete by the first half of 2015.

The Synergies for the Combined Entity

Since the deal faced several challenges from the French government and the counter bid from Siemens (SIEGY), GE revised the deal terms to make it more attractive. This clearly indicates that Alstom’s acquisition is crucial to GE’s future expansion, and so it gave it all to ensure that the French company comes to it.

As per the new terms of the deal, GE will take over Alstom’s gas turbine business and form joint ventures in the other business units such as the highly sensitive nuclear division, the steam turbine, electrical transmission and renewable energy. GE’s Chief Executive Officer Jeffrey Immelt desires to reduce dependence on the finance segment of GE and build the industrial roots through inorganic and organic growth.

The deal will help GE to scale up the power segment including the gas and steam turbine. These segments have seen sizable growth in the past and have huge potential to grow in the future as well. Industry players are therefore keen on using such equipments to make efficiency gain and add to their profitability. GE already has a solid share in the worldwide gas turbine market, which is estimated to increase to 24% within the next 6 to 7 years. However, this does not include the Alstom acquisition. If we factor in Alstom’s business and the cost synergies, GE’s market share would be even higher.

According to a study conducted by Forecast International, by 2020 more than 40% of the electric generation in the U.S. would come from gas turbine. So Alstom’s acquisition is quite a meaningful one for GE and has brilliant prospects of bringing enormous growth in future.

Also it is important for GE to bring other regions under its operations given that the U.S. is a saturated market where it already has strong presence. To grow further, it is essential for the industrial major to stretch its wings in other developing territories and Europe as well. This is precisely why the company’s into its acquisition mode to develop the industrial wings. Last year in April we saw GE acquire Lufkin Industries Inc., which is an oil and gas pumping equipment maker, in a $3.3 billion deal.

Parting Thoughts

Alstom’s acquisition is one of the most crucial combinations that GE’S made in the recent past. The French conglomerates assets would enhance GE’s value and add massively to its long term growth potential. The revised deal that proposes joint ventures is criticized to be complicated by many, including some of Alstom’s minority shareholders. But this was one of the ways to pacify the French bureaucrats, who would not have given their vote for the transaction otherwise. The joint venture scheme somewhat helped in alleviating their fears regarding a foreign acquisition. Overall, the deal is well placed to benefit both the entities now and in the future. The acquisition is given GE’s core business a big boost by bringing substantial benefits and competitive edge to the company.

About the author:

Quick Pen
A seasonal writer with a Management Degree in Finance and interests in automotive, technology, telecommunication and aerospace sectors.

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