- Alstom would enhance GE's engineering expertise in power production and rail transportation, which are both core businesses.
- Alstom is trading at a discount to U.S. industrials, indicating that the price paid will not be excessive, and will likely be preferable to a domestic acquisition target.
- GE maintains cash overseas to shield it from taxation, and this deal is a sensible conduit through which to further shield that capital, while making it productive.
This week, rumors swirled that General Electric (NYSE:GE) may be interested in acquiring Alstom (OTCPK:ALSMY) for an estimated $13 billion, and that such a bid is imminent. Alstom is a French company that designs, produces and services products used in power generation and transmission markets, such as railroads.
This deal may be the start of a GE push to acquire more European and international assets with the cash the conglomerate doesn't want to expatriate due to taxes, provided the deal can get done. It is also a continuation of the company's push to acquire more industrial assets and focus more on its roots. At this point, it appears probable that a deal could occur, though GE may be required to divest some power assets in order to get government approval.
Alstom's businesses and expertise appear to be sensible acquisition targets, given GE's considerable industrial focus, and a smart use of GE's overseas cash. Moreover, Alstom has underperformed GE over the last several years, as has most of the European market, indicating that the deal may be a good value. The largest fear is that France or the European Union will block the acquisition, but that appears unlikely.
In 2001, the European Union rejected GE's effort to acquire Honeywell International (NYSE:HON) on the grounds that it would have severely reduced competition in the aerospace industry and resulted in higher prices for customers that would include both airlines and governments buying fighter jets. GE had actually busted an attempted United Technologies (NYSE:UTX) acquisition of HON that appeared more likely to get approved.
If GE was willing to divest a substantial portion of Honeywell, that deal may have been approved, but it wasn't. Now, it is probable that GE will enter discussions with regulators already presuming that some concessions will be necessary. GE's CEO, Jeff Immelt does have some experience getting deals done in Europe. Last year, GE completed a deal to acquire Avio, an Italian aerospace company. As part of the Avio acquisition, GE made concessions that included promising the E.U. to avoid any business involving the Typhoon fighter jet that European nations use, and promising the U.S. to avoid interfering with an engine component that Avio designed for UTX's Pratt & Whitney division.
Alstom would be GE's biggest acquisition since the failed Honeywell attempt, and may be the final major move by Immelt before he retires as CEO. In many ways, it appeared that Jack Welch hoped the Honeywell acquisition would be his curtain call. Welch postponed retirement in order to complete the transaction. Any acquisition of Alstom may require several months of discussions with French and EU officials in advance of deal approval.
Beyond being a sensible acquisition of engineering expertise, this deal is also a smart use of capital. Like many large U.S. companies, General Electric holds significant sums of cash overseas. The conglomerate maintains essentially all of its earnings from international business in overseas accounts, because doing so keeps it shielded from U.S. corporate taxation, so long as it remains outside the jurisdiction. Moreover, these sums have tended to grow substantially over time due to expanding international businesses.
By using the capital to acquire international businesses, GE has found a use for the cash that will not only further shield that prior income from U.S. taxation, but also enhance the conglomerate's international earnings potential. All of this indicates that this deal is a sensible one for GE to make, and that it will be willing to make the necessary concessions with European regulators in order to get it done. Furthermore, the deal should make GE a better company.
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