- General Electric's deal to buy Alstom has two major negative points for GE shareholders.
- France's economy minister is a Soviet-style bureaucrat that will strong arm his conditions on any deal.
- Alstom is also not a healthy business and GE is overpaying.
It's all over: the drama that began last week with General Electric (NYSE:GE) offering to buy French rival Alstom (OTCPK:ALSMY) and subsequent to that, Siemens (SI) offering a different deal for Alstom has been resolved. GE has won and indications are that Alstom has accepted GE's $13 billion bid. There are several pieces here on SA where authors have espoused the virtues of such a merger but in this article, I will take the other side; I think GE is making a mistake with Alstom and as such, I was hoping Siemens would win the bidding war.
GE's bid has many hurdles that I believe make it an undesirable deal for shareholders. First, buying any large French company is a nightmare in that the socialists in charge of the western European country are fiercely opposed to takeovers of French companies. The economy minister, Arnaud Montebourg, reminds me of an old school union boss, kicking you-know-what and taking names in the process simply for the joy of it. He is an overly confident bureaucrat in every sense of the phrase but the sad fact is that no deal in France happens without his input. This kind of strong arming isn't good for anyone but the socialists are so bent on preserving French jobs at all costs (and I mean all costs), I think GE will be hamstrung when it comes to owning Alstom. The way Montebourg is talking, GE can basically run Alstom exactly as it's being run now, largely negating any positive effects of a merger that generally come with back office redundancy eliminations and so forth. In dealing with Montebourg, none of that is possible. Immelt has to crawl to Montebourg, hat in hand, begging for approval and that is not the kind of deal I want GE to make.
In short, Montebourg sees it as his responsibility to control the French economy. Can you imagine the Secretary of Commerce acting in such a manner? That's not how free economies function and France is certainly not a free economy. You can ask Yahoo! (NASDAQ:YHOO) how much fun it is to deal with the socialists; it tried to buy Dailymotion from the France Telecom SA and Montebourg single-handedly shut down negotiations. We are dealing with a Soviet-style, state run economy with France and why GE wants to get tangled up in that mess is beyond me.
The other reason I don't like this deal is simply that Alstom is not a great business. I think GE is watering down its portfolio simply to make a deal and appear that it is trying to keep growing. I am generally a fan of GE's acquisition targets, as you know if you read my articles, but I can't understand this one. It wasn't that long ago that Alstom was on the verge of bankruptcy due to poor cash management and waning demand and yet, here is GE offering $13 billion for a piece of that business. I could see the virtues of adding on a new business for GE if it was allowed to do as it wished with the new company. However, as we saw above, that is certainly not going to be the case as Montebourg strokes his own ego and imposes conditions on GE.
Why GE wants to get involved with any French company is beyond me, given the ridiculous, xenophobic leaders the country has saddled itself with but when you consider Alstom's poor track record, I just don't get it. Perhaps Immelt has access to information nobody else does but I suspect that whatever due diligence GE has done is lacking given the overwhelmingly negative points of this deal. I want GE to use its cash to grow the business but this is the wrong way to do it. This deal has two big problems: the French government and the fact that Alstom is not a healthy business. Either one of those problems is enough to make me dislike this deal but in concert, I think GE is making a huge mistake.
Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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