Swiss engineering firm ABB has announced that it is acquiring the industrial solutions business unit of General Electric at a price of $2.6 billion. Under the deal ABB will continue to use GE’s brand. ABB is betting that it can increase the lackluster margins GE Industrial Solutions currently enjoys in the next half a decade by cutting costs and boosting profitability.
“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 the chief executive officer of ABB, Ulrich Spiesshofer.
According to the Swiss engineering firm $200 million can be generated in annual cost savings. Last year GE Industrial Solutions brought in $2.7 billion in sales. Some of the products that this unit of General Electric produces includes power supply equipment needed in facilities such as data centers, lighting control components, switchgears and circuit breakers. ABB will finance the deal with cash.
By acquiring GE Industrial Solutions ABB is aiming for a bigger presence in North America. The Zurich, Switzerland-based power grids maker also wants to get access to General Electric’s installed base of power and electrical products all over the world. ABB has promised to upgrade the aging products of GE Industrial Solutions using its own technology in order to turn around the declining market share especially in the United States.
Share buyback program
Due to the acquisition the Swiss power grids maker is suspending a share buyback program where $3 billion had been allocated for the exercise. The acquisition will see ABB emerged as the second-largest electrical components supplier in the world behind Schneider Electric of France. Integration costs are expected to reach a figure of $400 million.
While the current EBITA (Earnings Before Interest, Tax and Amortization) figures for GE Industrial Solutions is 6% of sales, at ABB”s Electrification Products unit, EBITA is 15% of sales.
According to ABB’s chief executive officer, he only consented to the acquisition after a supply partnership between GE and ABB had been struck where the two will increase the level of buying and selling amongst themselves. In a conference call the CEO of ABB revealed that without the supply partnership agreement the deal wouldn’t have made sense.
General Electric has recently come under pressure from Nelson Peltz, an activist investor, who wants the industrial conglomerate to dispose of certain assets in order to concentrate on businesses that generate higher margins.