Wednesday, Alstom accepted a binding cash offer from GE to acquire Alstom's energy business. Alstom agreed to pay GE a break-up fee of 1.5 percent of the purchase value of $13.5 billion if it accepts another offer. GE will also provide Alstom $3.4 billion in cash for the cash Alstom holds in this division.
It should be noted that the deal does not yet have the approval of the French government, which contains some officials that are not really happy with the deal and that have encouraged Siemens AG (SI) of Germany to submit a competitive bid.
This potential deal is also interesting, to me, in terms of what it shows of the leadership of GE's President and Chief Executive Officer, Jeff Immelt.
Mr. Immelt has faced "legacy" issues during his tenure at the top of General Electric. I briefly examined this situation in a recent post on GE's most recent quarterly earnings.
Furthermore, as readers of my posts know, I have been very interested in two other companies where corporate leaders have had to face "legacy" issues. The situations that I examined are those of Microsoft (NASDAQ:MSFT) and Bank of America (NYSE:BAC).
Of these issues, which Mr. Immelt has had to confront, one involves dealing with the legacy of the "legendary" Jack Welch, his predecessor; and the second one has to do with the culture created by Mr. Welch that the management community of GE really didn't want to change when Mr. Immelt took over. In addition to these issues, General Electric was blindsided, early on, by the events surrounding the 9-11 attack in 2001, and then it was hit by the Great Recession in 2007.
However, it was the Great Recession that really loosened things up at GE. Finally, the Board of Directors and many in management realized that things had to change, and it was during this time that Mr. Immelt finally gained the room he needed to make some changes at General Electric. As I mentioned in my post on GE earnings, "It was at this time that Immelt became more of a 'turnaround' executive." I also added that, currently, "Things are moving in the right direction and there is good evidence that they will continue to do so."
One thing became obvious to Mr. Immelt. He had to reduce the role that the financial side of GE's business contributed to corporate profits. At one time, a good bit more than fifty percent of GE's profits came from the financial area. GE had turned into more of a financial institution than an industrial giant.
Mr. Immelt's stated goal was to reduce the contribution of the financial divisions to less than 30 percent of the company's profits. If the deal with Alstom goes through, the non-financial areas of GE will provide around 75 percent of GE's profits by 2016, more than achieving his goal.
For Mr. Immelt to accomplish this, GE will have to make the largest acquisition in its 122-year history. Furthermore, the guideline set up by GE's Board concerning its preferred acquisition size is less than one-third of the proposed deal. So this deal really is a "big" - and risky - one.
In other words, Mr. Immelt is really stepping out on this transaction!
Mr. Immelt has moved aggressively to spin off or sell off parts of GE's financial business. He has not been reluctant to move in this area. But given the size and risks involved in cutting the Alstom deal and bringing it to completion, he has really taken on a major task, one that could add a massive amount to Mr. Immelt's own legacy.
And speaking of Mr. Immelt's legacy, this gets back to my previous post on General Electric. It appears that "Immelt 'has led several board discussions about shortening the expected tenure of GE's next chief executive to between 10 to 15 years.'"
Mr. Immelt has been the CEO for almost 13 years. But as I reported in my post, "directors increasingly expect that he will step down before reaching the two-decade mark…"
I added, "I could see that Immelt might want to stay for a few more years to see the consequences of his efforts to re-structure the company. Then he could go out on a high note talking about how he turned around the company and got it refocused."
This would be quite a legacy.
Alstom's Chairman and Chief Executive Officer Patrick Kron appears to be really pushing the deal, and it seems to me that, given the French government's position and the fact that Siemens is preparing a competitive bid, the role of the Alstom leader is going to be crucial. Mr. Kron apparently has reason to take a strong position in the effort, not only because he sees it to be a good deal for Alstom, but also, according to The Wall Street Journal, because he has issues with both the French government and with Siemens.
Furthermore, the Alstom Board of Directors "has unanimously supported GE's bid," although it accepts the fact that it has a "fiduciary duty" to consider any bid given it by Siemens. In addition, Alstom's biggest shareholder, the billionaire Martin Bouygues, is strongly in favor of the deal.
In terms of the economics of the deal, it is crucial that GE is well versed in the part of Alstom's business that it is acquiring - the power and energy units. Immelt is not making a "conglomerate" acquisition. And the basic justification for the transaction has to do with scale. The power and energy business requires a large commitment of physical capital to the enterprise, and the ability to make the returns necessary on its investment is highly dependent upon achieving more scale.
Alstom's performance has suffered in recent years because of the economic turmoil going on in Europe and because of the growing role that Asia is playing in the European continent. The power and energy units make up approximately 70 percent of the company's operations. Achieving a greater scale is very important for these units to gain maximum performance.
It looks as if Jeff Immelt has really taken charge of the future of General Electric and is moving it in a realistic and sensible direction.
I must admit that I have not always been a big Immelt fan. Historically, successful CEOs have had to act decisively in the first two or three years of their tenure to make the changes that they perceive are needed in the large organization they take over. If they don't, they lose their opportunity and the company tends to stagnate.
Looking back, it looked to me as if Immelt was a relatively ineffective CEO in his early years. However, this may not have totally been the case. The "legacy" culture that existed along with the returns that were being posted - in his early years, GE earned at least a 15 percent return on equity - apparently made it very difficult to introduce change.
As mentioned above, Mr. Immelt moved during the Great Recession. The centerpiece of this movement came with the realization that GE has to reduce its reliance on the financial side of its business. Immelt took advantage of this opportunity and initiated change. He has since built on that change. It appears as if he has a good chance of creating a strong "legacy" himself, building a strong and focused General Electric for his successor, whoever or whenever that might be. I hope he succeeds.
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