General Electric Unplugs Siemens From Alstom

May. 1.14 | About: General Electric (GE)


Alstom is worth every penny, of which GE will now have to tap its $57 billion overseas cash pile.

It's time for CEO Jeff Immelt to start receiving the credit he deserves.

This deal just secured GE's future for the next 5 to 10 years, particularly from the standpoint of cost synergies between the two companies.

Ever since reports surfaced that industrial conglomerate General Electric (NYSE:GE) was interested in struggling French company Alstom (OTCPK:ALSMY), there have been a series of maneuvers to keep the investment community at the edge of their seats.

Last week I advocated for the $13 billion deal and offered several reasons why GE shareholders should want it to happen, including Alstom's market position as a strong operator in the power generation and transport industry. Recall, General Electric's CEO Jeff Immelt is steering the company back to its industrial roots. Alstom would fit right in.

But I never believed GE rivals like Honeywell (NYSE:HON) and Siemens (SI) would allow GE a smooth route to Alstom. Two days later, a Reuters report suggest that Alstom's German rival, Siemens tried to block GE's bid with counter-proposal to Alstom along with a swap of assets. Aside from "getting in the way," Siemens wants to acquire Alstom's power businesses for itself. In return, Siemens is offering Alstom its high-speed train and locomotive units.

Concerned that Alstom shareholders would disapprove, Siemens management said they were prepared to offer a "significant" amount of cash to Alstom shareholders if they agreed. recall, the Reuters story also said that France's Economy Minister, Arnaud Montebourg, met with Jeff Immelt, GE's CEO, to discuss the future of Alstom.

According to the article, Montebourg is prepared to block any deal he "considered unsuitable" in terms of the long-term interests of the French company, its employees and the economy. But now it looks like GE is going to get what it wants after all.

Alstom's board has now formally accepted a $17 billion all-cash offer. Note, the original offer was $13 billion. So clearly money played a role in all of the maneuverings. While the French government wanted Siemens to seal the deal, GE emerged as the victor. For the French government, the concern was related to Job losses. Given Siemens' close proximity of France, it was believed that Siemens would be more "in-tuned" with the French employment climate.

But GE figured out a way around it. Not only did CEO Jeffrey Immelt promise to hire more workers, but the company also said it will make France its global base for its steam turbine, electric grid, offshore wind and hydropower businesses. But don't assume this means GE will not have the flexibility to reduce costs where it sees fit. Although the company has promised to not cut jobs in France, less than 20% of all of Alstom employees are in France. I'm not advocating for job cuts, but GE still has flexibility with 80% of Alstom's global headcount.

But upon the news, Siemens sent a letter to Alstom board advising of benefits to its competing bid. Clearly Siemens is not going out quietly. But this is because Siemens understands the competitive advantages General Electric just acquired. Siemens said it would pay up to 11 million euros in cash to Alstom shareholders, while retaining a 19% stake in the resulting company. But is it too little too late?

I'm not ready to say yet that this is a slam-dunk deal for GE. While it looks very promising, there is also the break-up fee clause, in which Alstom said it would pay GE 1.5% of the purchase value if it accepted an alternative offer. So there is still the chance that Siemens can sweeten the deal. Or for that matter, Honeywell. The deal is expected to close in 2015.

All told, this is GE's biggest acquisition - albeit more than it wanted to spend. But from my vantage point, it was worth every penny for GE, which will now have to tap its $57 billion overseas cash pile. And it's time for CEO Jeff Immelt to start receiving the credit he deserves. For many GE investors, he has become a punching bag. But this deal just secured GE's future for the next 5 to 10 years, particularly from the standpoint of cost synergies between the two companies.

As I've said recently, GE is now back on track towards becoming the industrial giant it was known for. And with the stock trading at around $26 these shares are a sure-bet to reach $30 by the second half of the year. On a longer 12 to 18-month term, $35 is definitely possible, assuming this deal closes and accretive cost-cutting benefits are met.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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