Page 79 - Bloomberg Businessweek-October 29, 2018

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The Deal That’s

Making GE Sick

By Brooke Sutherland

There are bad deals, and then there’s Plenty of GE watchers found things Bloomberg Businessweek (USPS 080 900) October 29, 2018 (ISSN 0007-7135) H Issue no. 4590 Published weekly, except one week in January, February, April, June, July, September, and December, by Bloomberg L.P. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Of

76 General Electric Co.’s purchase of Alstom to like about the purchase when it was
SA’s energy assets. announced. Profit margins at the Alstom
The 2015 takeover of the French com- assets GE was acquiring were well below
pany’s gas-turbine operations in many that of its own power unit. In theory, that
ways encapsulates the mismanagement was an opportunity for improvement. GE
that led to GE’s current turmoil. GE touted the prospect of selling more ser-
vastly overpaid for Alstom, prioritizing vices across Alstom’s large installed base.
scale over logic and ignoring signs of a As it turned out, demand for gas tur-
peaking market. The result is the almost bines collapsed not long after GE com-
$23 billion writedown GE announced in pleted the takeover, as clean energy
October, the majority of which is tied to became more affordable. Orders for
the Alstom deal. services later crumbled as well, in part
As chief executive officer, Jeff Immelt personally negoti- because of upgrades that reduced outages and extended
ated the purchase, which cost about $10 billion after adjust- turbines’ life. The underlying cash-flow assumptions for the
ing for joint ventures and other changes to which GE agreed Alstom deal now appear to have been dead wrong, and
to win the French government’s blessing and fend off a com- GE’s lax pricing discipline on its own contracts is coming
peting bid from Siemens AG. John Flannery, whom former back to bite it. GE’s power unit had an operating margin
Danaher Corp. CEO Larry Culp replaced as CEO in October, of 5.6 percent last year, compared with 10.6 percent in the
was one of the deal’s architects as GE’s then-head of M&A. year ended March 2014 for the Alstom thermal-power busi-
ness that constituted the bulk of the deal.
$17.3b may now hamstring GE’s effort to resuscitate its power unit.
The concessions Immelt made to close the Alstom deal

GE was required to pay $3.1 billion this year to buy Alstom’s
stakes in three joint ventures, a cash drain it could ill afford.
ILLUSTRATION BY GEORGE WYLESOL ● OVER AND OUT ● WHEN LOWER IS BETTER Immelt’s pledge to create 1,000 net new jobs; it’s unclear
And France has threatened to fine GE if it falls short of

how that will affect the company’s push for cost cuts.
Taking a writedown on Alstom is one thing. Unraveling
Most of GE’s writedown stems from
Wind turbines’ cost per watt
this bad bet is a much bigger task. <BW> �Sutherland is a
decreased about 35 percent
the goodwill associated with the
Alstom deal, aka the amount GE paid
from 2007 to 2018, according to
deals columnist for Bloomberg Opinion
Bloomberg NEF.
above book value.