Articles
Alstom's range of steam turbines is used in French nuclear plants and is not part of the joint venture with General Electric
There’s big acquisitions and then there’s GE-mega acquisitions. Last month the company known by its detractors as the “Evil Empire”, expanded slightly when it’s offer to buy part of French engineering group Alstom was accepted. The $17bn deal will see Alstom’s Thermal, Renewables and Grid businesses merged with GE’s power and grid business to form three new joint ventures: Grid, Renewables and Global Nuclear.
The process had some late drama injected into it by a joint counter-offer from Germany’s Siemens and Japan’s Mitsubishi. But the deal was always going to make headlines. Not only had it been a long time coming, it is a big and complex arrangement that will impact several markets. An intriguing international aspect, and a combination of French pride and politics, meant it was the subject of global media attention for weeks.
Yet less than a month on, the dust has settled and the analysts are sharpening their knives. There is some criticism of the deal’s complexity - the new businesses are technically joint ventures between General Electric (GE) and Alstom. But overall the response has been favourable. There are significant synergies between the businesses of both companies. Strategically the deal gives GE a significant foothold in European markets it has traditionally found difficult to penetrate.
Anna Faelten is deputy director of the Mergers and Acquisitions Research Centre (MARC) at the Cass Business School, University of London and both researches and advises industry and government on mergers and acquisitions (M&A). She says that once the ink dries on big “transformational” deals such as the GE / Alstom one, the most important part begins, the post-transaction process. Get this wrong and forget about realising any value from the deal, no matter the size. “You need to plan for integration when you are planning the acquisition, with clear milestones and a communication strategy,” she says. “You then have to convince the employees of your shared vision. The worst case would be a set of employees uncertain for the future, sitting there looking for other jobs.”
“The bigger and more complex cross-border deals add to the difficulty. But GE is the most prolific, successful acquirer in the world. They know how to do it.”
Large M&As are a fairly modern phenomenon. Around 50% of all global M&A activity involves US companies. Most M&As happen in the engineering and industrial sectors. “The sector is driven by M&A”, says Faelten. There are two main reasons. Skills and knowledge are integral to the success of an engineering firm, and its easy to buy skills and knowledge instead of developing them. Another major factor is the cost savings that can be gained from consolidating processes and supply networks. Faelten says the importance of the supply chain to engineering and manufacturing firms has also lead to the recent trend of large companies buying out key firms in their supply chains.
GE is typical of the US-style corporate - an umbrella organisation managing a portfolio of different businesses. Another industrial examples is United Technologies, a company that comprises of businesses with more recognisable brands such as Otis elevators and Sikorsky helicopters. Such companies have become characterised by a high level of M&A activity over the decades, hence nicknames such as “the Evil Empire.” But they have improved the way they handle M&A considerably. During the 1980’s, says Faelten, around 70% of all M&As would fail. Today, companies like GE have developed slick processes for the successful integration of companies and have large internal management teams, dedicated full time to M&A strategy, planning and execution through all its stages.
With such professional and practiced teams and approaches, it seems a fait accompli that the Alstom / GE merger will succeed and realise the value GE has invested in the deal. However, success itself can be difficult to judge with big transformational deals, which tend to happen in mature sectors and involve mature companies. Such deals are unlikely to propel the companies into high levels of growth, says Faelten and are often more designed to shore up a current market position.
Sometimes deals can ignore value altogether and be strategic in the market. This often happens in the technology sector, where companies are often bought in order to acquire intellectual property (IP) before it disrupts a market or in order stops a competitor owning the IP. At worst deals can be empire-building, what Faelten terms the “hubris” deal, companies getting bigger just for the sake of getting bigger. Surprisingly this happens a lot and should always trigger a “red alert” amongst investors and analysts. But even when a deal doesn’t add up strategically or from a value perspective, long term they value can be realised from deals if they are handled correctly post-transaction.
Often M&As are a way of increasing the rate of change within a business in a favourable way. Faelten says: “M&A’s are often just management tools for change. It just happens that they can get very heated. Unless you are in the top management team, you are left out of the decision, and people don’t like that. But it’s rare to have political backlash to the extent that it stops the deal.”
A recent example is the recent failed Pfizer / Astrazeneca deal she adds, where the UK government’s fundamental problem with the deal wasn’t the loss of jobs, the company had been “restructuring” for a while due to tough market conditions, it was about the loss of control about where the jobs would go.
So there’s big acquisitions and there are successful acquisitions. The two don’t exclusively follow. But if they are to succeed, it always has to be a careful acquisition and, after decades of practice, GE, the largest of large US corporations, isn’t known for its carelessness.
Ten landmark deals that shaped their markets
Much as the GE / Alstom deal seems massive, it is just the latest in a series of bold international deals that have shaped the markets they operate. Indeed, ranked according to its size and compared with other landmark deals in the last few decades, it is relatively small.
1. Vodafone buys Mannesmann for $183bn in 1999
2. Pfizer acquire Warner-Lambert - $87.3bn in 1999
3. Exxon acquires Mobil - $80.3bn in 1998
4. Glaxco Wellcome and SmithKlineBeecham - $72.4bn in 2000
5. Inbev acquires Anheuser-Busch $60.8bn in 2006
6. Daimler Benz buys Chrysler - $37bn in 1998
7. GE and Alstom merge power and grid business - $17bn in 2014
8. Boeing buys McDonnell Douglas - $13.3bn in 1996
9. AzkoNobel buys remainder of ICI - $8bn in 2008
10. Ford sells JLR to Tata - $2.2bn in 2008