G.E.’s Latest M&A Activity

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Here’s the report on G.E.’s M&A activity in today’s (3/29/11)  New York Times:

            “General Electric announced plans Tuesday to spend $3.2 billion for a 90 percent stake in Converteam, a company based in Massy, France that specializes in high-efficiency electric power-conversion components like motors, generators, drives and automation controls.

           “The components are used across a variety of industries at the core of G.E.’s industrial and energy operations, including its oil and gas initiatives, as well as solar and wind power.

          “Under the terms of the agreement, which is expected to close during the third quarter of 2011, executives at Converteam would retain a 10 percent stake in the company and management at both companies would purchase any remaining shares over the next two to five years. * * *

          “The move represents the latest in a string of energy infrastructure acquisitions for G.E., which also picked up the well-support unit of John Wood Group for $2.8 billion last month, as well as Wellstream Holdings, the British oil services company for $1.3 billion last December and Dresser, a manufacturer of and servicer of natural gas engines, fueling systems and other components, for $3 billion last fall.

          “Joseph R. Mastrangelo, a vice president with G.E.’s oil and gas division, described the acquisition of Converteam as a strategic move, allowing the company and its industrial and offshore oil and gas customers, for example, to readily replace inefficient fixed-speed drive technology with Converteam’s more flexible variable-speed drive systems, which respond in a more fine-tuned way to production demands, saving energy and reducing costs.

          “Converteam also produces converters that help smooth out the intermittency bumps that make solar and wind power a challenge to integrate with other sources of electricity.

          “‘That’s what this technology allows us to do,’ said Joe Mastrangelo a vice president for G.E. Energy’s oil and gas division. ‘Converteam has a full technology portfolio that optimizes performance.’

          “Roughly a quarter of the world’s electricity is used to turn rotating machines in all manner of industrial and power generating applications, according to General Electric, and highly engineered components designed to make those processes as efficient as possible is an increasingly competitive — and lucrative — field. The sector was valued at roughly $30 billion last year, and alongside Converteam, companies like ABB, Siemens, Emerson Electric, Rockwell, Schneider Electric, are seeking to capture a piece of the growing market.

          “Many analysts agreed that the acquisition was in keeping with G.E.’s overall quest to expand its energy infrastructure operations — though some noted that Converteam’s earnings before interest, taxes, depreciation and amortization for 2010, at about $240 million, were substantially lower than the deal’s $3.2 billion price tag.” [1]

         Of course, I am not privy to the details of G.E.’s “overall quest to expand its energy infrastructure operations.”  And there is no way to know how this latest acquisition and those that immediately preceded it would fare in a traditional anti-trust analysis. 

          But it is clear that, in opting to buy the company rather than to purchase from it the flexible variable-speed drive systems it makes, G.E. is achieving control over that company’s market share and improving its competitive position.  Because the anti-trust laws are not enforced, companies like G.E. need not be concerned about how much such an acquisition actually restrains competition.  

          Moreover, the entire flurry of recent acquisitions reported in this article suggests that G.E. may be on what Barry Lynn calls a “shopping spree.”  This suggests that the company may be managed with an eye toward optimizing financial, rather than manufacturing, considerations.

          It seems likely that the M&A activity is closely related to G.E.’s zero tax liability this year.  One thing is certain, G.E. did not take long to decide what to do with its $3.2 billion tax credit.         

[1] “G.E. to Buy Converteam for $3.2 Billion” by Tom Zeller Jr., NY Times, DealbookTues., 3/29/11

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