EVERY WEEKDAY IN DECEMBER, TED MAGAZINE IS COUNTING DOWN THE TOP 20 STORIES OF 2016. BELOW, THE #5 MOST-VIEWED STORY OF THE YEAR, ORIGINALLY PUBLISHED ON SEPTEMBER 25, 2017.
Looking for an opportunity to dig deeper into the U.S. market, ABB officially agreed to buy GE Industrial for $2.6 billion in a deal that had been off and on for months. By comparison, in 2016, GE Industrial’s sales were $2.7 billion. The deal will make ABB the second largest manufacturer of electrical components, behind just Schneider Electric.
After the deal was announced, ABB described GE Industrial as “an unloved child” and believes it can improve GE Industrial’s margins over the next five years to create a $200 million yearly cost benefit. GE Industrial makes circuit breakers, switchgear, lighting control components, and power supply equipment. ABB has a similar product line. It hopes the sale will vault ABB further into the U.S. market, and plans to use its company technology to improve GE Industrial’s dropping market share.
“The key rationale of the integration is, first we will make this business better. And then afterwards, we will make this business bigger and better,” said ABB Chief Executive Ulrich Spiesshofer told reporters in a conference call. ABB will suspend its $3 billion buyback deal to pay for the merger. It believes integration costs alone will be $400 million. ABB is also planning to cut costs and improve profitability at GE Industrial’s plant in Georgia.
ABB has been in acquisition mode for the past few years, but did say it would be it’s last for the time being. It will pay for GE Industrial with cash and will not need to raise equity capital.
A part of the deal calls for a supply partnership between GE Industrial and ABB where the two companies have agreed to buy and sell from each other. “Without that, the economics wouldn’t have worked. With the supply partnership, the economics at the price of 0.9 times revenue is working,” Spiesshofer told reporters.
This is the latest move by new GE CEO John Flannery to cut costs. Flannery took over for Jeffrey Immelt last month. Flannery is keeping his focus on higher margin businesses in the GE portfolio, and has previously announced that he plans to sell GE Lighting. Current by GE is not for sale. But Flannery did say he is reviewing all GE business units and plans to talk about their futures in November.
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