Many companies undergo restructuring…even when we are talking about some of the biggest names in their respective industries. General Electric is no exception. In one of the most talked about current business deals, GE is selling off its Industrial Solutions branch to its European rival, ABB for $2.6 billion. Find out more about the reasoning behind this sale and possible improvements that could be made to Industrial Solutions.
About Industrial Solutions
The Industrial Solutions business offers circuit breakers, relays, panel boards and other industrial equipment for several markets including healthcare, mining, renewable energy, telecommunication, construction and data center sectors. For quite some time, the business has been yielding low margins and activist investors have been pressuring the company to offload it in the interest of increasing GE’s share price.
How ABB Can Make Improvements
The Zurich based ABB company is hoping to improve these margins over the next five years. They are seeking to better access the North American market as well as GE’s larger base of installations worldwide. They believe that upgrading aging products with newer technology will improve the business as well as the United States market share. “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 ABB Chief Executive Ulrich Spiesshofer.
What Does the Deal Entail?
The deal made between the companies is one that will result in ongoing business relations. It includes a long term agreement for the use of GE’s brand as well as a strategic partnership. This will involve increased buying and selling between the two companies. ABB is also suspending it’s $3 billion share buyback program as part of the deal. The will ensure its position as the second biggest supplier of electrical components in the world. The stock market is happy with the increased shares of the company as a result of the deal.
Critics of the Deal
However, the jury is out on whether the selling of Industrial Solutions will be a wise idea for either company. Critics cite that the GE Unit’s operating earnings are just 6 percent of sales as compared to the 15% operating margin of ABB’s comparable Electrification Products division. “GE Industrial Solutions isn’t in top shape, so ABB has its work cut out for it,” said Zuercher Kantonalbank analyst Richard Frei.
More About the Transaction
This transaction marks the first major portfolio change that took place under new chief executive John Flannery who took over on August 1, 2017. He is attempting to reverse the year’s stock slide on the Dow Jones industrial average. The sale was make under pressure of activist investor Train Fund Management. Proceeds from the sale will be used to fund restructuring of the company.
Whether this deal will be successful or not remains to be seen. We can only keep our fingers crossed as the profitability of the transaction may lead to improvements in the electrical industry as well as the financial state of the stock market. Fingers are crossed.