Ronan Le Gall

Ronan Le Gall

Columnist

ronan.legall@edhec.com

Focus on M&A


Siemens and Alstom failed to complete their possible merger announced at the end of September 2017; it went from being questioned, to being vetoed by Margrethe Vestager, the European Commissioner for Competition on 6th of February of 2019. In fact, both are leaders of the rolling stock industry, respectively with a turnover of €7,825bn and €6,881bn. If the merger had been finalized, it would have transformed the two companies into a major protagonist of the sector, thus reducing competition and raising prices in the industry, which frightens many politicians, consumers and competitors.

Was the French Prime Minister Edouard Philippe correct when he said that this decision was a “blow to the European industry”?

Figure 1: Turnover of 3 Major Players in the rolling stock Industry

Figure 2: Number of Employees of Siemens Mobility & Alstom

The Outlines of the Programmed Merger

Despite some arguments, progress had been made. Most of the terms of the expected merger had been discussed between the 2 companies. Firstly, they agreed to transform the name of the two entities into Siemens-Alstom, which would be run by Henri Poupart-Lafarge, the current CEO of Alstom. The new group was to be listed in the Paris Stock Exchange. Siemens would have controlled more than 50% of the new company’s shares and its headquarters would have been located in Saint-Ouen, where Alstom’s headquarter is currently located. Yet, if Alstom recently communicated that their shareholders had approved all the new resolutions and the proposed combination of Alstom with Siemens’ Mobility business, this deal would create a global leader whose market share is 3 times that of its closest competitor (except for CRRC). For that reason, the European Commission has decided to put the transaction under investigation. Its aim was to examine whether the deal would deprive European rail operators of a choice among suppliers and thus leading to higher prices for millions of Europeans who use rail transportation. Moreover, Siemens had already had a setback before, as the European Commission vetoed their arguments regarding CRRC and they deemed that Chinese suppliers were unlikely to enter the market of rolling stock in the foreseeable future. This also raises concerns among Alstom and Siemens Mobility competitors, including Bombardier, Hitachi, and Ansaldo.

Figure 3: Siemens and Alstom’s order book

One Thoughtful Wedding

Although the latest information coming from journalistic sources did not bode well, the French economic minister Bruno Le Maire judged that it would be “an economic error” and “a political mistake” to turn the merger down. His opinion is bound to the success of CRRC, the Chinese company that continues to grow and to conquer new territories. In 2017, CRRC announced its first order coming from Europe (Czech Republic). Moreover, they decided to construct a factory in Canada to extend its marketing channels in North America. At the end of 2017, CRRC announced the creation of an area of commercialization of automatic public transport vehicles in France. Not to mention that they plan to register $15 billion of export orders by 2020. This expansion from CRRC leads to the belief that its European competitors need to redefine and reorganize themselves to preserve its market shares: for that matter, it could have been a profitable union.

A Decisive Deadline

The EU executive had set a February 18 deadline to decide whether to clear the deal. The companies could offer concessions such as asset sales and pledges to allow rivals access to key technology and services to address regulatory concerns. The deal was then far from being buried. Siemens and Alstom tried to offer concessions, for its high-speed trains and signalling activities.

Making Concessions

Despite this set back, Joe Kaeser, Siemens AG’s CEO, stated that he was all but stressed. On the contrary, he recalled that Siemens was “willing to make concessions” and “will find other solutions” to please the Commission. Several options were available for them to do so, among which there is one consisting of selling assets, highlighted by many EU officials. According to some journalists, they agreed to sell some activities and to increase the duration of the technological licenses they let other companies possess.

The Outcome: European Commission’s Veto

Since 1989 (the first time the European Commission had a veto power), only around thirty mergers have been blocked, while more than 6,000 have been approved. The European competition Commissioner Margrethe Vestager justified this decision because it would have led to “a price increase of the railway signal systems (…) and of the future generations of high-speed trains”. The efforts granted did not convince the European Commission. According to the latest, the concentration would have led to a rise in prices, less choices, and a decline in innovation.

“A Blow to the European Industry”, Really?

Many politicians deem that this decision was a mistake. The first reason which supported this outburst is the fierce competition faced on this market from the Chinese CRRC which produces around 200 high-speed trains a year, compared to the 35 produced by both Siemens Mobility and Alstom last year. Questions were raised about Siemens Mobility and Alstom’s abilities to compete with such a giant without combining their forces. It is true that their concentration would have enabled them to enjoy economies of scale and join their forces to innovate. However, these arguments need to be qualified: this merger could have caused waves of layoffs and Siemens Mobility would have taken at least some control over Alstom (the German would have owned 50% of the new entity while the other half would have been listed on the Stock Exchange). Besides, many indicators encourage us to be optimistic. Alstom reaped record profits, and its order book reaches €40 bn euro. Siemens also has a full order book (€28 bn euro), and Siemens Mobility has recently paired with Thales for signalling systems which could lead to a new program of innovation. Hence, they don’t seem to be threatened in the short-run.

Conclusion

Even if this decision was mostly negatively welcomed since the European interests weren’t placed first, Alstom and Siemens Mobility have the potential and the ability to keep on investing and entering into new contracts. The problem is that the competition between China and America is increasing, and we cannot be sure that they won’t destroy the competition. CRRC, the biggest manufacturer of trains in the world, a State company, is backed by China’s money. The result: The subsidies they get from Chinese State allows them to offer lower prices than its competitors. It then appears as unfair competition. For that matter, the EU should grant better subsidies to Alstom and Siemens so that they can counteract it and innovate to differentiate and offer better products.

Sources:
  • Financial Times, Rail technology magazine, Zonebourse, Siemens, Alstom, La Croix, Le Monde, Les Échos
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