“A tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased. Because of incomplete information, emotions or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the item’s intrinsic value. As a result, the largest over-estimation of an item’s value ends up winning the auction.” – The Winner’s Curse (Investopedia)
On Friday, Reuters reported that Siemens (SI) and Mitsubishi (MSBHY) are finalizing a joint offer for Alstom’s energy operation, a unit currently under formal agreement to be purchased by General Electric (GE) for $13.5 billion (€9.9 billion) enterprise value and $3.4 billion (€2.5 billion) of net cash — totaling $16.9 billion (€12.35 billion). The news service indicated that, under the Siemens-Mitsubishi bid, “Siemens would acquire Alston’s gas turbines business, while Mitsubishi would inject cash and industrial assets into a joint venture in steam turbines…Mitsubishi and the French government would take equal stakes in Alstom.” The bid is quite complex, as currently reported, and it reveals the great lengths the French government may go to halt a GE-Alstom combination out of fears of job cuts and losing energy independence (a source of national defense). Though French Finance Minister Michael Sapin expects a revised offer from GE that is higher than the US-based firm’s current offer price, proposed April 30, we would generally be against GE materially upping its offer solely for political reasons. However, a higher deal value could make sense for GE, but only if additional synergies are feasible and can be identified.
The GE-Alstom situation continues to be dynamic and politically-charged, and in light of the latter reason, largely unpredictable. We’re reiterating our view that, for GE, the Alstom deal is a nice-to-have transaction, not a must-win acquisition. The US industrial conglomerate could simply walk away from the proposal (if the Siemens-Mitsubishi consortium wins) and receive a nice break-up fee equal to 1.5% of its originally-proposed purchase price. Under this scenario, we would like shares of GE all the same. On an organic basis, for example, GE’s industrial backlog has never been stronger, and we like that it continues to diversify away from its riskier and relatively opaque financial operations. We also cannot forget about the strength of the company’s dividend, which yields ~3.2% at present.
That said, if GE does let political motivations dictate financial decisions, the firm could end up engaging in a textbook “winner’s curse” bid, overestimating the intrinsic value of the target. We think GE’s executive suite is far too savvy to fall into this trap, however. GE CEO Jeff Immelt is focused on the right return metrics, in our view, and we have confidence the leadership team will simply walk away from the Alstom transaction in the event the deal characteristics become value-destructive to GE shareholders. We’re monitoring new developments very closely, and we expect quite a bit of news flow on this topic in coming weeks. GE remains a holding in both the Best Ideas portfolio and Dividend Growth portfolio.
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