There have been some big acquisitions and mergers in the industry over the last two years. PEi looks at how some of these deals came about, how they are working and assesses what might be in store for the future.
It has been just over six months since the power industry was rocked by the news of the merger between ABB and Alstom. The merger may be the last really big deal between engineering companies in the near future, but is by no means the end of the general market consolidation initiated by the changes in the industry which began 10-11 years ago.
Nick Salmon, executive vice president of the new company, ABB Alstom Power explained: “Ten years ago we had national utilities which purchased on the basis of national preferences. With deregulation and privatization we now have privately owned utilities which are responsible to their shareholders for getting the best deal. This means buying on a global basis. This has driven price levels down and made having a local or national presence less important.”
Merging brings benefits of scale such as better global reach and a bigger research and development capability, which are essential ingredients to survival. Choosing the right partner, however, is the key to any successful merger. “You have to look for a common set of values and objectives so the management has a clear mandate on what it has to do. ABB and Alstom decided that a 50:50 joint venture was the right structure to produce a manageable company that could work in the best interest of all concerned,” noted Salmon.
While the merger has made ABB Alstom Power the market leader in many areas, it is still only number three in the lucrative big gas turbine market. Above 50 MW, GE and Siemens are the clear leaders.
ABB Alstom Power’s immediate goal is to overtake Siemens as number two, but this will be a difficult task. To do this, it will have to make some serious inroads to the booming US market. In 1998, according to the McCoy Power Report, its US market share in the above 50 MW market was 5.6 per cent (compared to 12 per cent globally). This compares to
59.2 per cent for GE and the remaining 35.2 per cent largely coming from Siemens Westinghouse, the US affiliate of Seimens.
The company is still seen by many as a European company and this could hinder its chances in a market where US utilities feel more at home with US products. Salmon confirmed: “It is important that we are seen as an American company. In fact we employ 4000 people in the US.” It is hoped that this will be helped by the fact that the former ABB Combustion Engineering is an American company which will help the new name to be seen as American. There are signs that this is beginning to happen with ABB Alstom Power just securing 2400 MW of gas fired capacity for merchant plant in the US.
The deal means there are now four clear global players in the market: GE, ABB Alstom Power, Siemens, and Mitsubishi Heavy Industries (MHI). This concentration makes it more difficult than ever for the ‘second division’ players to survive. “We will now see a lot of tidying up,” commented Salmon.
This has already begun. For example, GE is in talks to acquire the thermal operations of Kvaerner Energy, while boiler manufacture Balcke Dürr merged with Thermal Engineering International. In the hydropower market, GE acquired the hydro operations of Kvaerner; Siemens and Voith formed a joint venture while Sulzer has been acquired by Voest Alpine.
But mergers do not come without challenges. The main challenge to the ABB Alstom Power merger according to Salmon was divesting of the Alstom gas turbine business to GE. “This was a pre-condition to the deal being possible. We could not have two competing gas turbine technologies in the same company.”
The rest of the challenges are by no means behind the new company. “Integrating two large companies into a company with 50 000 employees is a major management challenge. One key advantage we have is that the two former companies were both products of similar mergers ten years ago. Many of both management teams had lived through those changes and were used to working in a multi-cultural environment,” said Salmon.
An idea of some of the challenges that companies have to go through as the result of a merger or acquisition, is evident in Siemens’ purchase of Westinghouse Power Generation. One year down the line Norbert Koenig, member of the managing board of Siemens (KWU) commented: “As you can imagine, combining two local groups across the Atlantic is quite a challenge. However, while all of us on the group executive board would clearly like the integration to move much faster, we are pleased with the first year’s accomplishment.”
Early on in the process the group board set the groundwork for the integration to be a “merger of equals” based on the principles of adopting best practices. “As such we value the cultural differences in our global work force rather than viewing this as a hurdle and intend to lever those differences,” noted Koenig. “We recognized that even though we were in the same business, as individuals we do things differently. In light of this, the likelihood of some frustrations can be high…probably 100 per cent. Fortunately we anticipated that some of this would happen and have worked to compensate for it by focussing our integration activities on the external market drivers that are influencing our business and our competitiveness, rather than our internal needs.”
Focussing on external market drivers seems to be paying off. Whether by chance or design, moving quickly on the acquisition of Westinghouse allowed Siemens to take advantage of new market opportunities. Certainly it allowed it to get a head- start, as a European company, in the booming US market.
Randy Zwirn, formerly president and CEO of Westinghouse Power Generation and now member of the managing board of Siemens KWU and president and CEO of Siemens Westinghouse Power Corp. said: “We are structuring a company with a clearly global mindset but with multiple home markets. This means maintaining local market platforms from which we can deploy a full range of resources that is aligned with region specific market needs. In the early stages of our integration, we began to see the strong resurgence of the US market. By utilizing the combined resources of our Hamilton and Berlin gas turbine factories, we were well positioned to build a strong order backlog.”
Acquiring for growth
Commenting on the spate of consolidations in the market, Robert Nardelli, president and chief executive officer of GE Power Systems said: “GE’s acquisitions have been acquisitions of growth. A prerequisite of the ABB Alstom deal was the sale of Alstom’s large gas turbine business to GE.”
GE saw the purchase of this business as a strategic move which allowed it to gain operational presence in Europe while maintaining its core technology. “The acquisition also brought us access to local suppliers that previously we were unaware of and gave us the local and cultural relationships we needed,” said Nardelli.
GE put together its acquisitions strategy in 1995 to re-invest heavily in its core business. By the end of this year the company will have made some 40 acquisitions to add about $4.3 bn of top line growth. Nardelli explained: “We were going to look at acquisitions as a way of filling in our strategy as we went from a narrowly focussed business on power generation to broaden our view of the energy industry.”
This approach has extended GE’s technology portfolio while bringing previously unavailable opportunities.
“Before our first acquisition of Nuovo Pignone we had zero sales from European-based operations. Next year we will see $4bn in sales from Europe. The deal added to our product portfolio and also got us into oil and gas.”
Nardelli also cited the Kvaerner Hydro purchase which doubled the size of GE’s hydro business while adding seven new technologies to its business. In addition, a number of deals with companies like Plug Power, Niigata and Elliot Energy Systems means GE can now tap into markets which go down to 7 kW.
Takeovers throw up several challenges but GE has some guiding principles. “When you’re searching for potential acquisition candidates you have to go back to the essential guiding principles. We look for adjacent businesses that allow for synergies of consolidation and deliver productivity. They must also be able to utilize our current channels to market.”
GE has a term which it calls ‘metamarket’. This puts the customer in the centre and looks at every cost that customer incurs. It then looks at what percentage of that customer cost can become its revenue. Nardelli explained: “We just bought Glegg, a water company in Canada. Utilities, IPPs etc. spend money on water facilities and water treatment. Therefore Glegg’s business was clearly adjacent and it clearly supports our other strategy of doing long term service. This gives us the ability to build new power plant water treatment facilities and the expertise to provide long term service for these facilities around the world.”
According to Nardelli, these acquisitions build additional “brick”. The next step is “click” alliances through e-Business. “We talk about brick and click. When you access GEPower.com you will get the benefit of our core re-investments and ‘brick’ acquisitions as well as the benefits of ‘click’ alliances. This will for example bring boiler specifications into our online configurator so customers can specify an entire plant on-line, including our alliances with boiler manufacturers.”
With the equipment supply side of the equation now fairly rationalized, the next important aspect of the merger and acquisitions business is what will happen on the customer side. In the US there seems to be a merger every week. In Europe we have seen Veba merge with Viag, while RWE and VEW have also just agreed on a merger. This will further impact the equipment suppliers.
Salmon commented: “If today we have, say, 200 customers worldwide for major power plants, this could be down to 50 within five to ten years.”
At this point the equipment supply company merger cycle may enter a new phase resulting in even fewer suppliers. Salmon speculated: “If you look at precedents in other industries, the nearest thing to our business is the airframe business and the aeroengine business. In airframes it has really come down to just two companies and in the aeroengines business, three. I expect this is the sort of size we will end up as an industry – two or three global players”. With such prospects on the cards, making the right moves will be all important in the coming years.