THE EFFORT TO execute Immelt’s pivot was still gathering force, which meant renewing the search for new sources of industrial revenue. The notion of buying Alstom, the French power equipment rival, had caught on quickly in Fairfield. But the rationale of the transaction, though it hit some thematic high notes, had been transformed and twisted as it wound its way upward through the layers of bureaucracy that weighed any major GE decision.
Just as GE had promised to redouble its efforts industrially, the deal represented a way for the company to invest in its oldest and largest businesses, the ones with the longest lead times and theoretically most stable returns. Alstom and GE were already something like second cousins, thanks to their shared historical connections to Thomson-Houston, the electric company that merged with Edison General Electric in 1892 to become General Electric. And to Immelt, a singular appeal of the deal was that it would give GE a dominant position compared to the other major players in the gas turbine market, especially Siemens and Mitsubishi.
When Immelt explained any given strategy or projected the company’s future performance, he continued to lean on athletic ideas of conquest. His competitive instincts in business drove him to such thinking. Like a football coach intent on picking up yards on the field, he liked taking market share, and one of his favorite tropes was promising that GE was poised to “win.” Buying Alstom would drive the other teams backward as GE claimed more and more of the field.
Furthermore, Alstom now seemed eager to make a deal. As GE teams mulled the possibility of an acquisition of the French conglomerate’s power units, Alstom’s imperious chief executive, Patrick Kron, reached out to Immelt. Would the American be willing to meet over dinner in Paris?
Whether Immelt fully recognized it or not, Kron was increasingly desperate to find a buyer for his company. Beneath the surface at Alstom, rot ran dangerously deep. Its power business was far behind GE and Siemens in bringing a new family of turbines to market. Worse still was the unprofitability of what it was already selling. The quiet capital raise that Adam Smith had noticed had turned out to be exactly the distress signal he had suspected. Alstom was dangerously low on cash.
Now its sell-side market analysts were getting suspicious. Out in the power markets, the company was aggressively bidding for any new business it could win, often offering prices to build new coal- and gas-fired power plants so low that it would prove impossible to turn a profit once all the work was complete. But those long-term profits were of little concern to Alstom’s sales teams—they needed to win those deals for the down payments alone: the deposit paid by a customer on signing such a contract was virtually the only cash coming in the door.
Kron had already wooed his intra-European rival, Siemens’s CEO Joe Kaeser, at a private dinner, but had not come away with a deal. Teetering on the brink of insolvency, the French company would probably need to seek shelter in bankruptcy or a government rescue if something didn’t happen quickly.
Complicating matters further was Kron’s biggest shareholder: the family-controlled Bouygues SA, a publicly traded conglomerate with sprawling interests of its own in businesses ranging from heavy construction to telecommunications. Since 2006, Bouygues had owned a nearly 30 percent stake in Alstom, which it was now eyeing nervously as the company’s finances looked more and more alarming. Bouygues itself needed to find a way to refinance its own struggling telecom unit. Any deal for Alstom would have to come at a price that could placate Bouygues. Moreover, there was an even more critical party to be appeased: the French government, which viewed Alstom much as GE was viewed in the United States—as an industrial franchise central to the nation’s identity, as well as a huge employer.
All of these obstacles were in the air as the GE corporate jet descended into Charles de Gaulle Airport in February 2014. Jeff Immelt was taking a small detour on his way to the Winter Olympics in Sochi.
He had dinner plans in Paris with Patrick Kron.
Alstom wasn’t Immelt’s only target. As always, multiple business development teams from the industrial units were jumping at the chance to bag the big deal that the CEO wanted. After leaving Paris on the GE corporate jet, Immelt stopped again, this time in Helsinki, to visit Wartsila, a Finnish company that made marine engines, power generation units, and oil- and gas-extraction equipment. Immelt and the GE board were also weighing a deal code-named Project Lion: the purchase of an oil and gas company roughly the same size as Alstom, according to people who knew about the deliberations.
By the early spring of 2014, the momentum began to build behind the Alstom deal. That was when, on an early conference call with some of the highest-ranking executives from corporate and the Power business, Adam Smith sensed a problem. Listening in on the discussion about GE’s attempts to come up with a valuation of Alstom, Smith paid close attention when the conversation shifted to the enterprise value they would ultimately have to assign to Alstom and its assets. “Enterprise value” is a financial measure of a company’s market valuation plus debt minus cash. It was a more complete valuation than simply totaling the value of outstanding shares, because it considered the entire capital structure.
Because GE wanted to take over Alstom’s gas and wind turbine and electrical grid businesses, leaving its passenger train operation behind as a stand-alone French company, the American firm wouldn’t be making a bid of cash per share to Alstom’s board. Instead, GE would be coming to the table to negotiate an enterprise value of what it would be taking away from the existing Alstom—the value of its backlog of power plant orders, its plants and physical assets, its debts and liabilities, and its technology.
Even from the early days, according to some members of the deals team, they were evaluating Alstom with unusually little insight into the inner workings of the French company. A simple scan of headlines would show that Alstom’s business prospects had been dim of late, and that it faced questions on several fronts about its business practices, including a foreign bribery investigation by the US Department of Justice. And GE’s access to Alstom’s internal records, which would have shed light on the value of its backlog and the extent of its exposure to criminal liability, had been limited.
Now, as the GE executives conferred, the conversation was unfolding roughly backward. They wondered about the price that GE would need to put on Alstom—the deal’s enterprise value—to put the company into play. And in particular, they tried to figure out what they would have to offer to get Bouygues enough of a return on its equity in Alstom that the majority shareholder would be willing to consider a sale.
In that moment, Adam Smith was listening to the logic of the deal collapse. Alstom had been worth examining because it was financially imperiled; the value of pursuing it in the first place had been to capture its assets at a bargain, strip what GE wanted, and then sell the rest, like an old car, for the parts. Now the company was talking about making sure Bouygues saw a return on its investment in a company that, absent a buyer, seemed to be headed for bankruptcy or a possible government bailout. Going into the deal with that kind of logic, Smith thought, GE would be seriously overpaying on almost any price it offered.
Years later, top GE executives, including Immelt, would say that they never heard any serious dissent about the Alstom deal. If anyone had harbored second thoughts, they would say, those thoughts were arrived at in hindsight. Anyone who thought the company wasn’t doing what it should, or was paying too much, had been duty-bound to say something at the time rather than keep silent.
But in fact, some did attempt to raise objections, though they did so advisedly, cautiously, and briefly. A member of the Power business team that worked on the deal said that by then it had become clear that when any acquisition was a top priority of corporate, or of Immelt’s, any dissent was unlikely to alter GE’s course. Indeed, such a move was certain to brand the dissenter as someone uninterested in helping the team win.
With its backward logic, the deals team was working to put together a value for the entire Alstom power enterprise from which they could back out a price per share that would get Bouygues to the table. The bankers scribbled their calculations, using values that fluctuated from €30 a share to as high as €34, as they tried to make sure that the accounting of the enterprise value they finally alighted on truly made sense—or at least could be framed as reasonable when presented to shareholders.
That effort led to some strange arithmetic. In the final GE bid for Alstom, more than half of the enterprise value—the price GE would actually pay for the struggling French assets—came from “cost synergies.” In other words, more than half the value of what GE was buying would come from slashing employees and factories and other costs once the deal was closed. Cost synergies were a common part of any major acquisition, though some GE competitors, like Honeywell, made a point of not allowing their deal-makers to use the promise of future cost-cutting savings to make the math on a deal work out. In contrast, GE’s entire Alstom deal, even on paper, relied on shedding workers and factories, thus raising profit margins, in order to remain in the black.
It all came back to the way the negotiation had started. “The valuation was artificial,” a former GE executive said. “It was fixed based on Bouygues.” Once the company leaders, from Immelt and Steve Bolze on down, had decided that they needed to make the French investor whole in order to get the deal done, the secret work being done by bankers and lawyers was an exercise not in calculation but in justification: they were coming up with an explanation for the amount the company had decided they needed to pay.