The Best Investment Is Often The One You Don't Make.
The title of this article is actually a great quote from Donald Trump's New York Times Best Seller "The Art Of The Deal." If you haven't read it yet, I highly suggest you do. I feel the maxim is quite apropos regarding General Electric's (NYSE:GE) bid for Alstom at this point. Another great quote regarding major business deals that more specifically reflects my present position on the situation comes from Wells Fargo (NYSE:WFC) CFO Timothy Sloan:
When you look at a deal and its structure looks like an octopus or spider, just don't do it.
Several recent developments regarding the Alstom deal have made me wary of General Electric getting involved with Alstom (OTCPK:ALSMY). Nevertheless, I have complete confidence in General Electric and Immelt's negotiating skills. Furthermore, deal or no deal, General Electric is a buy for a multitude of reasons. In the following sections I will do my best to deconstruct the recent deal developments and lay out my bull case for the stock.
New French Decree resembles an old negotiating tactic
The French government late Wednesday delivered a decree giving the French government the power to block General Electric's bid for Alstom. French Economic Minister Arnaud Montebourg, a champion of government intervention in corporate affairs, touted the new powers. The decree allows the government to veto foreign investment in energy, water, transportation and other sectors deemed strategic to the country.
The timing of the decree and Montebourg's well-known opposition to General Electric's bid for Alstom's assets is not good news. France is now playing hardball, of this I have no doubt. The decree is designed to force General Electric to up the ante and sweeten the pot for Paris. It will give France more say in the potential sale of Alstom's energy assets. Moreover, Montebourg has already publicly criticized the General Electric proposal and advocated a deal with Siemens (OTCPK:SMAWF). I can see how this may turn into a bad situation for General Electric once the deal is sealed. What if France decides to make another decree after General Electric has jumped in with both feet so to speak? I posit this latest move by France is a grand example of the tried and true Straw-man negotiating technique. The Straw-man technique is used to make your negotiating opponent believe something is very important when it really isn't to extract more value from you. If Alstom doesn't get an infusion of cash soon, there may be no French energy assets to protect, essentially making the French decree moot. Furthermore, General Electric still has an Ace up its sleeve.
General Electric's Ace up its sleeve
So far, General Electric hasn't folded and may still have a few cards to play. News broke Friday General Electric is sending a top executive to Paris in an attempt to save the deal. A General Electric spokesperson stated:
We appreciate the importance of the energy sector to France, and we will continue to have open and productive discussions with the government.
General Electric has already made several concessions. The company has offered to include French participation with regard to Alstom's hydropower unit and General Electric's railroad signaling business. Furthermore, General Electric has offered to sell in total Alstom's wind-power unit to French investors. The elephant in the room is what concessions is France making? It's not like they have a bevy of suitors for the faltering energy conglomerate. Of course Siemens has been mentioned and I'll address that in the next section. Moreover, shouldn't the price be going down - not up - if General Electric is conceding assets? France is definitely not in the power position as far as I can see. The risk to France is future potential foreign investors in France may be dissuaded from doing business in France. This couldn't come a worse time for France as the French economy appears to be stagnating. France's 2014 first quarter GDP was flat after rising only 0.2% in the fourth quarter of 2013. I submit this is General Electric's Ace in the hole. The decree is France's attempt to change the rules of the game while it's in progress because it's holding a losing hand. This irks me to no end.
The Siemens Take Away Close
GE is still Alstom's only formal suitor, though Siemens is supposedly studying Alstom's books in preparation for a possible bid. Moreover, Montebourg has made it clear he would favor a European option. Montebourg recently stated:
Talks with Siemens over a possible tie-up with Alstom are continuing and are extremely constructive.
This is in direct conflict with the Alstom board's outright declaration the company would prefer to work with General Electric. I submit this is just another negotiating ploy known as the take away technique. This technique works much like the old adage "people want what they cannot have." It is mostly employed by high pressure used car salesmen who need to close the deal with the customer on the spot. If your negotiating opponent thinks that you have another buyer waiting in the wings and may buy the goods out from underneath them, they often want it more. The revealing point in the matter is the fact we heard nothing of Siemens' interest in Alstom until General Electric went public with a bid for the company. I see this as another weak attempt by France to extract value from General Electric.
So why is General Electric still a buy deal or no deal?
In this section will list the top five catalysts that make General Electric a buy regardless of the deal outcome.
- A strong Euro bodes well for US multinationals such as General Electric. The Euro recently closed near its 52-week high compared to the US dollar. A weak dollar makes US products less expensive for foreign buyers. This underpins General Electric's earnings potential.
- The Fed's zero interest rate policy in conjunction with its quantitative easing policy has left baby boomers out in the cold with nowhere to turn. Fixed income instruments such as bonds and CDs have virtually no yield currently. General Electric's outstanding 3.3% dividend yield coupled with the company's projected growth provides income investors with the opportunity to capture both capital gains and income production.
- Market participants appear to be rotating into safe haven plays as they sell out of high risk momentum stocks. With the market trading at all-time highs and the summer doldrums upon us, it seems discerning investors are turning to solid investments like General Electric rather than high flying momentum stocks such as Twitter (NYSE:TWTR).
- General Electric is focused on streamlining operations and divesting itself of unprofitable business units. GE plans to shed all operations that aren't meeting a minimum profit margin target of 10%. This will allow GE to focus on the company's strengths such as its industrial business. This fact alone should have a dramatic impact on the company's bottom line.
- The stock is fundamentally undervalued. General Electric currently trades for a 21% discount to the industry. I suggest this leaves the stock with plenty of room to run.
I submit General Electric still holds all the cards in regards to the Alstom negotiation. Further, Immelt and his team are well aware of the rudimentary negotiating tactics being employed by the French government. In the end, if a deal gets done it will favor General Electric. And if not, General Electric is a great investment currently on the company's own merits alone. If a global economic recovery reveals itself and the company's turnaround plan stays on track, this will create significant shareholder wealth over the coming years.
You must be able to see the forest through the trees. When you take a step back and look at the big picture, General Electric is in the midst of one of the biggest transformations ever seen in the modern era. I submit, once the turnaround is complete, General Electric will be a mean, lean, green cash flow producing machine. Sure the Alstom deal would vastly expedite the process, yet General Electric will get there in due time one way or another. This makes General Electric's stock a buy regardless of the outcome of the Alstom deal in my book.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE over the next 72 hours. 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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