ABB and Alstom agree merger

Siân Green

ABB and Alstom are to merge their power generation businesses into a joint venture company, ABB Alstom Power. Siân Green examines the aspirations of this new giant, a creation of the increasingly customer-driven and competitive power market.

ABB and Alstom announced last month their intention to merge their power generation businesses in a 50-50 joint venture company to be called ABB Alstom Power. The deal was not a total surprise given current pressures within the power generation equipment market, but its impacts will be significant.

The new company will be a leader in the power equipment and services fields, employing 54 000 people in over 100 countries, with 1998 proforma revenues of $10.7m and sales of $10.6m. Significant annual cost savings will be realised from the merger, which was announced on 23 March.

There are several driving forces behind the merger, most significantly the increasing competitiveness of the global power generation market and the impact that this has had on equipment suppliers. Power generation equipment purchasing has become a buyer`s market, with suppliers forced to lower profit margins on equipment sales in order to compete. This indicates overcapacity in the equipment market.

According to analysts Datamonitor, power plant suppliers are increasingly expected to take on higher levels of risk in project development, contributing equity and often funding projects through their own cash flow. Companies are therefore forced to become larger in order to manage these risks.

Most of the power generation equipment suppliers have suffered as a result of increased competitiveness in the market. Since its flotation last year, Alstom`s revenues have been significantly lower than other leading players in the industry, and it was seen as a prime target for takeover. ABB has also suffered, forcing restructuring and significant job losses in the past year.

The current market pressures have therefore produced the right environment for consolidation, and finding a suitable partner was important for both companies. Talks between ABB and Alstom began in late October 1998, according to Nick Salmon, president of Alstom Energy. “We feel, and I`m sure ABB shares the same view, that this is the best possible arrangement,” said Salmon.

The new company will comprise all of Alstom`s energy sector activities including its industrial gas turbine product line, and all of ABB Power Generation`s activities excluding its nuclear activities and its distributed power business. A prerequisite of the merger was the divestment of Alstom`s heavy duty gas turbines which it held under licence from GE. Alstom has therefore sold this division to GE, raising $910m to fund a cash payment to ABB of $1.5bn to compensate for the difference in the size of Alstom`s businesses.

The end of the Alstom-GE licence, which prevented Alstom from selling into north America, paves the way for an assault on the US market, a key target area of the new company. According to Datamonitor, the recent activity in the US market was another factor driving the merger, as both ABB and Alstom lost out to GE and Siemens-Westinghouse on the large number of power plant orders in the US in 1998.

During 1998, the US market made up 40 per cent of global demand for power generation equipment, a demand that ABB`s and Alstom`s competitors capitalised on quickly. ABB Alstom Power will now want a piece of this action, and plans to use its size as leverage in addition to a strongly focused selling approach. “The north American market didn`t pick up until April or May last year, and there is no sign of it running out of steam,” said Salmon. He added: “If we combine our forces, I hope that we can significantly improve market share.”

ABB Alstom Power is realistic about its ambitions in the USA, however. While it will be top in terms of market share for most of its products, GE will remain firmly in the number one spot for gas turbines. ABB Alstom Power`s initial strategy in the US is to rise to number two. “To take over GE`s position would be an unrealistic ambition at this stage,” said Salmon. “But we think that we can significantly improve our market share in heavy duty gas turbines.”

ABB Alstom Power will also use its strengths in the European markets, where continued deregulation and the combination of three major western equipment suppliers will make it difficult to see any clear leader. “We will see strong competition between strong competitors in the form of GE, Siemens-Westinghouse and ABB Alstom Power. It will be good for customers.” said Salmon.

While its size will give ABB Alstom Power considerable leverage in global markets, it will also mean benefits in terms of cost savings. Improvements in productivity and economies of scale are expected to yield synergy effects of between $400 and $450m annually within three or four years.

Rationalization and job losses are inevitable from such a major merger, but both ABB and Alstom say that these finer points have yet to be finalized. “There will inevitably be some rationalization through administration and also some areas of production,” said Salmon. “We want to draw up plans that are in the best interest of the people and in the best interests of the business.”

According to Salmon, one of the biggest savings will be made in pooling the two companies` research and development (R&D) budgets. This, he says, will help the company to make savings through product rationalization which will enable them to offer better products to customers at lower prices. While the companies` product ranges are a good fit, there is some overlap – in the steam turbine ranges, for example.

“At the moment, each company is investing in steam turbine research, [but] in the future, we can get more progress and breakthrough for the same budget,” said Salmon. Gas turbines will be a major R&D area for the new company, although less streamlining will be necessary.

ABB Alstom Power will essentially be the world`s largest power generation and equipment supplier. Logistically, it will not be an easy merger; it wants to maintain its European “cultural spread” and will undergo rapid change in its first full year of operation. But given its size, and the new opportunities this will bring, the transition could take years. As Salmon coined, “Change never finishes”.

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ABB Alstom Power combined sales by business