On Monday, the Swedish-Swiss automation company, ABB Ltd., or ASEA Brown Boveri Ltd., announced the acquisition of General Electric Co.’s Industrial Solutions, GE’s global electrification business, for $2.6 billion on a bet that it can recover lackluster margins at the unit over the next five years, according to the company.
GE Industrial Solutions has deep customer relationships in more than 100 countries and an established installed base with strong origins in North America, which is ABB’s biggest market.
ABB acquisition would strengthen its number two position in electrification globally, after France’s Schneider, and it would also widen its access to the North American market, according to ABB’s CEO, Ulrich Spiesshofer. The company said it sees the potential for cost synergies of $200 million annually after five years with the deal, which includes terms for long-term use of GE’s brand.
The two companies have also agreed to establish a long-term strategic supply relationship for GE Industrial Solutions’ products and ABB’s Electrification Products division, which manufactures and installs components for low and medium voltage electrical systems, that GE sources today, resulting in a unique global portfolio and very comprehensive offering for North American and global customers.
Initially, combining with GE’s unit will lessen Electrification Products’ margins to below ABB’s target of 15-19 percent, although ABB aims to return to that level by 2020, the company said.
“Combined with the long-term strategic supply relationship with GE, this transaction creates significant value for our shareholders,” said Mr. Spiesshofer.
“Together with the GE Industrial Solutions team, we will execute our well-established plans in a disciplined way to bring this business as part of the global ABB family back to peer performance. With this next step of active portfolio management, we continue to shift ABB’s center of gravity, in line with our Next Level strategy by strengthening competitiveness, mainly in the North American market and lowering risk with an early-cycle business,” he added.
According to the Swiss group, the purchase of GE’s electrification business will result in ABB putting on hold a $3 billion share buyback program announced last year, which it expects to close in the first half of 2018.
ABB, which operates mainly in robotics, power, heavy electrical equipment, and automation technology areas, noted that it will retain the GE Industrial Solutions management team and build upon its experienced sales force.
The latest deal follows ABB’s acquisition in April of Bernecker & Rainer, an Austrian specialist in factory computer operating systems, for a price estimated at up to $2 billion.
John Flannery, CEO of General Electric since August, is under pressure to improve performance at the U.S. group and is due in November to set out his plans for the company.
“The combination brings together two global businesses with a broad complement of electrical protection and distribution assets,” said John Flannery.
“ABB values our people, domain expertise, and our ability to operate in the segments where we have depth and experience. GE will also benefit through an expanded strategic supply relationship with ABB as the two companies work together.”
About GE Industrial Solutions
It is headquartered in Atlanta, Georgia, and has about 13,500 employees around the globe. In 2016, GE Industrial Solutions had revenues of approximately $2.7 billion, with an operational EBITDA margin of approximately 8% and operating earnings before interest, taxes, and amortization (EBITA) margin of approximately 6%.
Products made by the GE unit include circuit breakers, switchgear, and power supply equipment used for facilities including data centers.
ABB and GE Stock Performance
By 11:08 AM GMT+2, ABB Ltd. traded 0.46%, or 0.11, to 24.04 CHF. Its market capitalization was 51.80 billion, with a P/E ratio of 23.8, and a dividend yield of 3.18%.
While General Electric Company traded 0.48%, or 0.12, to 24.87 USD, by 4:02 AM GMT -4. It opened at 24.84 USD, with a session high of 25.04 USD, and a session low of 24.77 USD. Its market capitalization was 215.32 billion, with a P/E ratio of 28.51, and a dividend yield of 3.86%.
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