In tune with its corporate strategy to retrace its industrial roots, General Electric Company (GE - Analyst Report) is reportedly considering the acquisition of the French conglomerate Alstom SA in a deal pegged at over $13 billion. Although spokespersons of both the companies have refused to comment on the developments, insiders aware of the proceedings remain cautiously optimistic about the deal.
To augment its industrial operations, General Electric aims to leverage inorganic growth strategies, favoring targets that promise robust synergies and are immediately accretive. If the Alstom deal eventually goes through, which may be announced within a week or so, the transaction would mark the biggest acquisition ever for General Electric.
Alstom, operating in the power generation and transport markets, has been witnessing turbulent times lately. Europe’s economic slowdown has been weighing on its utilities equipment sales, and its power equipment business in the fast-growing economies seems to have lost steam.
The company’s power segment is straining under competitive pressure from General Electric and Siemens Aktiengesellschaft in Asia and Latin America. These headwinds have resulted in a sharp decline of over 20% in its stock price during the past year.
However, the maker of famed French high-speed TGV trains has a strong transport segment that has been securing record orders. Alstom is the global leader in turbines for dams, while it lags General Electric and Siemens in gas turbines. In the power transmission gear market, Alstom ranks third after ABB Ltd. (ABB - Analyst Report) and Siemens, while for trains and rail equipment, the firm competes with the German company and Canada’s Bombardier Inc.
In order to streamline its operations, Alstom has been downsizing its labor force and expanding in countries like China, Russia, Brazil, India and South Africa to capitalize on demand for trains and turbines. Alstom has been striving to cut costs to improve profitability as well as lower its debt burden.
General Electric appears to be betting on a steady revival in Alstom’s operations. The reduced share price might translate into a bargain buy for General Electric, even after accounting for the 25% premium above market value for the trade-off.
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Financing Avenues and Synergies
U.S. multinationals often hoard their cash offshore to avoid high domestic tax rates on profits earned abroad, and pay taxes only when they repatriate the cash. Out of General Electric’s $89 billion cash balance at the end of 2013, nearly two-thirds were held outside the U.S. The company may exploit its foreign cash reserves to finance the deal, thus lowering its effective purchase costs.
The acquisition would power the U.S. conglomerate to be in charge of Alstom’s power transmission technology and power plant maintenance facilities. Acquiring Alstom would fit well with General Electric’s strategy to realign its business in favor of its core industrial operations.
Reportedly, the two companies have already consulted with French government officials about the probable deal, in order to address any prospective anti-trust issues.
Following the financial crisis, General Electric has been steadily downsizing its financial arm, GE Capital. The conglomerate is going from strength to strength in its core industrial segment, and aims to derive 70% of its earnings from its lucrative industrial operations by 2015, up from about 55% in 2013.
The company is actively pursuing inorganic growth strategies to expand its industrial footprint. Last year, it bought Lufkin Industries Inc. for $3.3 billion to enhance its artificial lift capabilities and gear technology product portfolio. The acquisition enabled General Electric to take advantage of an oil-drilling boom and gain synergies in cost savings.
On Apr 17, General Electric posted first-quarter earnings that beat analyst estimates, driven by a 12% year-over-year increment in margins in its industrial segment. Its restructuring efforts are starting to pay off, and the conglomerate looks poised to continue with its positive momentum, going forward.
General Electric currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry that look promising include Federal Signal Corp. (FSS - Snapshot Report) and Noble Group Ltd (NOBGY), both carrying a Zacks Rank #1 (Strong Buy).