ABB Alstom Power announced in March that Alstom is to buy ABB’s 50 per cent share in their joint venture. The deal signals ABB’s exit from the world of power generation technology and leaves Alstom in a strong position. Siân Green reports.

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ABB Alstom Power, the 50-50 joint venture company established in June 1999 by the merger of ABB’s and Alstom’s power generation businesses, announced at the end of March that Alstom is to acquire ABB’s share in the company. Alstom will make a one-off cash payment to ABB of euro1.25bn under the deal, which is expected to close by May 2000.

ABB Alstom said in a statement that the power company would now be integrated into Alstom’s sector reporting structure with Claude Darmon, currently president and CEO of ABB Alstom, as head of the new Alstom Power. The deal will be subject to regulatory approvals.

While the announcement came as a surprise to many in the industry, particularly in view of the short life of ABB Alstom Power, the deal fits neatly into the operating strategies of both partners: ABB’s drive towards high value knowledge and IT-based interests and Alstom’s strategy of concentrating its activities around the fields of energy and transport.

Commenting on the announcement, Alstom Chairman and CEO Pierre Bilger said: “The timing of this transaction could not be better: we stand today at the eve of a turnaround both in the context of renewed economic growth and also in terms of the power company’s on-going initiatives to significantly improve operating performance. With this move, Alstom stands to benefit one hundred per cent from the new growth prospects and the full synergy effects.”

ABB and Alstom announced the merger of their power generation businesses in March 1999 to create the world’s largest power generation equipment supplier. The merger illustrated the increasing competitiveness of the global power markets and the impact of this on equipment suppliers. At the time of the merger, Alstom – the hived-off arm of Anglo-French company GEC Alsthom – was struggling to survive, while ABB had undergone a restructuring in order to overcome the competitive pressures. The climate was right for consolidation.

The merger deal received regulatory approval in June 1999 and at the end of that year, ABB Alstom Power announced a 14 per cent rise in orders in its pro-forma 1999 results.

Significantly, this latest development signals ABB’s exit from the power generation business and continues the company’s shift away from heavy engineering-based industries. The company has made several major changes to its business in the past year in order to change its profile into a high-value knowledge based company with strengths in IT and research and development. In 1999 it reduced its dependence on heavy assets, selling its nuclear business to BNFL of the UK and its stake in Adtranz, a transport engineering company. It also acquired Elsag Bailey Process Automation to take market leadership in the automation industry and increased investment in R&D.

In announcing ABB’s 1999 annual results, ABB’s President and CEO Göran Lindahl said: “We’re facing a new world where speed, flexibility and brain power are the keys to delivering greater value, and we’re reinventing ABB to be a leader in that world. We’re expanding into businesses where we can be leaders and leaving business where we can’t.”

ABB will use the proceeds from the sale of its power generation and nuclear businesses to continue its expansion into high growth, high margin areas which include power transmission and distribution. Developments in this direction in the first quarter 2000 include the acquisition of a UK power network service company, the formation of a partnership with a Swedish utility to develop a broadband Internet network, and the stepping up of activities in industrial IT and e-business.

Commenting on the sale of its power generation business to Alstom, Lindahl said that the transaction was in line with ABB’s strategy to increase its reliance on IT-driven technology solutions. “Today we focus more on industrial IT, and on infusing IT solutions and service into our activities in automation, building technologies, oil, gas and petrochemicals, and financial services. But our IT-driven strategy also means that we create IT-based solutions for the dramatically changing needs in the markets of power transmission and distribution.”

The deal leaves Alstom Power in a strong position for the future – quite a turnaround from its position only 12 months ago. It now ranks number one overall in the global power plant equipment, construction and services market. It has the widest spectrum of products and services for power generation comprising gas and steam turbines in all size classes, boilers and generators. Market analysts Frost & Sullivan believe that it is unlikely that the product mix of the company will undergo major changes or a strategic re-focus in the near future.

However, 40 per cent of ABB Alstom Power’s business was centred around the slow-moving European market and under Alstom’s control it will have to work hard to catch up with competitors Siemens Westinghouse and GE Power Systems in the dynamic markets of North America and Latin America. Even when ABB Alstom Power was formed a year ago, Alstom acknowledged that this would be a tall order (see PEi April 1999, Analysis).

Nevertheless, Alstom will still be able to capitalize on the synergies and cost savings that were intended under the merger of ABB and Alstom. Improvements in productivity and economies of scale were expected to yield synergy effects of between $400m and $450m annually within three or four years of the creation of ABB Alstom Power.