Siemens-Alstom Merger: A Signal of Greater Consolidation

With ongoing trend of the consolidation within the Rail industry, the two European industrial giants Alstom and Siemens announced on Tuesday, September 26th, 2017 the merger of their global rail operations. I believe this corporate strategy will increase value for both Siemens and Alstom by creating revenue, operational, financial, and cost synergies (ways to increase profit/earnings through a merger). It will assist the new entity in diversifying into the new and complementary product and service offerings, increasing production capacity, market share, and economies of scale, and reducing financial risks and potentially lower borrowing costs. These synergies will assist them to withstand the steep Asian competition.

The deal is unanimously supported by Alstom’s board, Siemens’ supervisory board and Alstom shareholder Bouygues. The railway manufacturers said in a joint statement stated that “the signing of a memorandum of understanding that guarantees the exclusivity of bringing their mobility activities into a merger of equals”.

Siemens will own 50% of the share capital of the new group consisting of the current Alstom and the rolling stock, signaling, and railway systems of Siemens. The global Siemens-Alstom headquarters for rolling stock business and the stock-market listing of the new entity will be in Saint-Ouen, in the Paris region, and the signaling and technology business in Berlin. The current CEO of Alstom, Henri Poupart-Lafarge, will take the operational direction. With 62,300 employees and operations in 60 countries, the total revenue of the new company would be €15 billion with over €1 billion operating results, and will have the order backlog of US$72 billion, and targets synergies of €470 million in 4-years at the latest after the closing of the deal, which is expected at the end of 2018.

The merger is aimed to challenge the Chinese supremacy (CRRC Corp) which is twice bigger than Siemens-Alstom combined. China’s CRRC Corp, which was formed via a merger of two state-owned firms, CNR and CSR, in 2014 with the aim of producing a national champion able to compete internationally. China’s CRRC, which is eyeing Skoda Transportation in the Czech Republic as a potential foothold in Europe, has an annual revenue of about $35 billion, is bigger than Siemens Mobility, the rail and infrastructure division of the German conglomerate, Alstom and Bombardier Transportation combined. Previously focused on China, it has won projects in Britain and the Czech Republic in the past year, and is eyeing the United Kingdom’s High Speed 2 project, which will connect London with cities in the north of England.

The new European rail giant would be more able to challenge the existing market dynamics with their pro-business credentials and a new Franco-German partnership at the heart of a more integrated European Union (EU) will give a boost to the manufacturing industry as EU prepares for Britain’s departure.

The deal comes as a blow to Bombardier, the Canada-headquartered group who had been in discussions about merging with Siemens since the spring. Its shares have dropped more than 10 percent since Thursday, when reports of Alstom’s interest in a deal emerged, and which faces a separate battle this week to protect jobs in Quebec and Northern Ireland.

With the merger, Siemens and Alstom will face multiple challenges related to the existing projects and order execution. For instance, the rival consortiums were bidding for one of the largest Indian rail contracts which were opened to foreign firms, at almost $3.06 billion. The supplier was to enter a joint venture with Indian Railways to build and supply 5,000 state-of-the-art electric coaches over a ten-year period. The merger could result in the entire bid being annulled and Indian Railways re-starting the tender from scratch. In addition, Siemens and Alstom, are major players in the Malaysian Transportation and Infrastructure sector. This merger would likely entail a review of contractual terms of projects being executed or will be executed as these companies have a different pricing structure, performance, and risk mitigation limits.

On a concluding note, this merger will be able to have better economies of scale and lower the average production costs. It will offer them better economies of scope where it would be easier to produce multiple outputs levels together in one plant than to produce similar amounts of each good in single-product plants. In addition, it will increase operational efficiency and Research & Development expertise, and improve interoperability and provide greater geographic outreach. However, a new entity must face disadvantages that include antitrust issues and legalities, the fact that the expected economic gains might never be realized, the reduction in flexibility and the potential of destroying value rather than creating it.